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GDP Contracts, Jobs Outlook Sours: Morici

Wednesday, 30 Jan 2013 | 9:56 AM ET
Auto parts production workers work on a production lines making both metal and plastic bumpers.
Norm Betts | Bloomberg | Getty Images
Auto parts production workers work on a production lines making both metal and plastic bumpers.

The Commerce Department reported GDP fell 0.1 percent in the fourth quarter. Weak conditions abroad and flagging U.S. competitiveness caused exports to contract by $27 billion, and businesses anticipating a further slowdown slashed inventories by $40 billion.

Friday, forecasters expect the Labor Department to report the economy added 160,000 jobs in January; however, employment tends be a lagging indicator and flat or negative GDP growth will cause unemployment to rise sharply in the months ahead.

(Read More: Private Sector Adds More Jobs; Services Lead Way)

The tax and spending package implemented January first reduces prospects for improved growth and jobs creation, as the U.S. economy and workers continue to suffer from insufficient demand.

Factors contributing to weak demand and slow jobs growth include the huge trade deficits with China and other Asian exporters of manufactures and on oil. Absent U.S. policies to confront Asian governments about their purposefully undervalued currencies, and to develop more oil in the eastern Gulf, off the Atlantic and Pacific Coasts, and in Alaska, the trade deficit and its drain on growth will worsen.

The recent surge in natural gas production, and accompanying lower prices, has the potential to substantially improve the international competitiveness of industries like petrochemicals, fertilizer, plastics, and primary metals—as well as consuming industries like industrial machinery and building materials. However, the Department of Energy is considering proposals to boost exports of liquefied gas—a costly and environmentally risky process. That would reduce the trade deficit and boost growth less, and create many fewer jobs, than keeping the gas in the United States for use by energy-intensive industries.

In 2013, virtually every wage earner is paying higher payroll taxes, and the recent budget deal raises income taxes $40 to $50 billion, annually, mostly from higher rates on families earning more than $450,000. Together, those further dampen consumer spending and aggregate demand.

On the supply side, increased business regulations, rising health care costs and mandates imposed by Obama Care, and higher tax rates on small businesses raise the cost of capital.

With the President's choices for key second-term cabinet and high-level Administration posts falling into place, small businesses have much more certainty—the assurance of more burdensome regulations, even higher health care costs and the prospects of further tax increases to cope with spending and deficit issues in Washington. All those will further tax investment, growth and jobs creation.

(Read More: Investors Throw Spain a Lifeline as Economy Shrinks)

Households are reporting pessimistic expectations about the job market. The Conference Board survey of consumer confidence was down significantly in January, in large measure because respondents reporting jobs hard to find rose to 38 percent and those anticipating their incomes to decline increased to 23 percent.

The economy must add more than 358 thousand jobs each month for three years to lower unemployment to 6 percent and that is not likely with current policies. That would require growth in the range of 4 to 5 percent. Without better trade, energy and regulatory policies, and lower health care costs and taxes on small businesses, that is simply not going to happen.

Most analysts see the unemployment rate for January steady at 7.8 percent, but the wildcard remains the number of adults actually working or seeking jobs—the measure of the labor force used to calculate the unemployment rate.

Labor force participation is lower today than when President Obama took office and the recovery began, and factoring in discouraged adults and others working part-time that would prefer full time work, the unemployment rate is 14.4 percent.

Though Congress has postponed Sequestration, the posture taken by the President in negotiations with Speaker Boehner indicates the Administration and Democratic lawmakers have little interest in substantially curbing spending on health care and other entitlements.

The likelihood of a downgrade in the U.S. credit rating by Moody's is significant and rising, and this weighs heavily on the investment plans of many U.S. multinational corporations. Those can invest and create jobs in Asia, where national policies better favor growth, instead of the United States where higher taxes, spending and deficits are out of control.

(Read More: Economic Optimism Growing on Wall Street)

Peter Morici is an economist and professor at the Smith School of Business, University of Maryland, and a widely published columnist. You can follow him on Twitter @PMorici1

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