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Morici: Friday's Jobs Report—Outlook Darkens for Economy, Obama

Friday, forecasters expect the Labor Department to report the economy shed 70 thousand jobs in July and unemployment rose to 9.6 percent.

Economists expect the private sector created about 100 thousand jobs but government employment fell 170 thousand, as more temporary census jobs disappeared.

Thirteen months into recovery from a deep recession, this is disappointing. The economy must add 13 million private sector jobs by the end of 2013 to bring unemployment down to 6 percent. President Obama's policies are not creating conditions for businesses to hire those 320,000 workers each month, net of layoffs.

Net of inventory adjustments, the economy demand for goods and services is growing at only 1.3 percent a year.

Job Losses
Job Losses

In the second quarter, consumer spending; investment in new structures, equipment and software; and government purchases added 4.1 percent to demand-but as imports grew much more rapidly than exports, the trade deficit tapped off 2.8 percent.

The difference, 1.3 percent, is annual growth in demand for U.S.-made goods and services. That has been the pace since recovery began in July 2009.

Businesses can accommodate up to 2 percent growth in demand by improving productivity and not adding workers. Unless the rapid growth in imports can be curbed, the U.S. economy is headed for very slow growth and rising unemployment. (Read more: Private Sector Adds 42,000 Jobs in July; Layoffs Slow)

Washington is not helping.

The massive permanent expansion in federal spending and regulatory oversight built into President Obama's budget is discouraging private hiring by raising fears of higher taxes and regulation. Simply, higher taxes discourage purchases of non-essentials and high-line durable goods, like better appliances, more appointed automobiles and higher-quality homes, and higher taxes and tougher regulation increase incentives to offshore production to locations where those burdens are less.

Prior to the crisis in 2007, President Bush spent 19.6 percent of GDP and the deficit was $161 billion in 2007; whereas two years into the economic recovery in 2011, President Obama's budget projects outlays at 25.1 percent of GDP and a $1.3 trillion deficit in 2011.

All that spending will require higher taxes, and raising taxes on families earning $250,000 simply won't be enough finance it. And, higher rates for those families will raise taxes on half the income earned by proprietorships—those small and medium sized businesses will invest less to create jobs.

"President Obama's policies are not creating conditions for businesses to hire those 320,000 workers each month, net of layoffs." -Professor, Smith School of Business, Peter Morici

Much of the $787 stimulus money was squandered on pet projects that created few jobs. For example, grants to build green buildings displace other planned construction and don't increase the amount of commercial space rented or built over the next several years.

The biggest banks received more than $2 trillion in TARP and Federal Reserve assistance to clean up their balance sheets and recapitalize securities trading, while the 8000 regional banks got little assistance and remain burdened by toxic real estate loans. Consequently, more than 230 regional banks have failed, and small and medium sized businesses cannot get credit to expand.

In addition to credit, businesses need more customers to create jobs, and the trade deficit-in particular, imports of oil and the imbalance with China-cut a huge hole in demand for U.S. goods and services. Without addressing oil and China, other efforts to create jobs are futile.

The president's moratorium on deep water drilling, though popular with environmental fundamentalists, kills jobs two ways-directly, by laying off workers in the oil and gas industry and indirectly, by sending too many consumer dollars abroad that could be spent here.

Detroit has the technology to build much more efficient gasoline-powered vehicles now, and a shift in national policy to rapidly build these would reduce oil imports and create many jobs.

China's undervalued currency that makes its products artificially cheap and deceivingly competitive on U.S. store shelves, but its promise of new flexibility on the yuan has not translated into meaningful revaluation.

If President Obama wants to fix the federal deficit and create jobs, perhaps he should dust off George Bush's 2007 budget and spend a lot less, get serious about better using and developing more conventional fossil fuels, and finally fixing trade with China.

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Peter Morici is a professor at the Smith School of Business, University of Maryland, and former Chief Economist at the U.S. International Trade Commission.

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