Morici: Where Are the Jobs?
Friday the Labor Department report jobs created in July, and forecasters are expecting another poor showing—75,000 jobs. My estimate is 55,000
Coming off tepid counts of 25,000 and 18,000 in May and June, unemployment is expected to rise in the months ahead. The economy must add 130,000 jobs each month to accommodate a growing adult population seeking work.
The key factor stifling jobs creation is sluggish GDP growth, which only advanced 1.3 percent in the second quarter and 0.3 percent in the first. Businesses can’t hire and pay new workers without more customers.
The culprit is weak demand for U.S.-made goods and services, which is often attributed to a weak housing market and the consumer debt hangover from the Great Recession. However, the latter reasoning is circular—faster GDP growth and more jobs would drive up housing prices and push down debt to income ratios. Moreover, growth in demand has not been so weak.
Since the recovery began in the third quarter of 2009, purchases by consumers, businesses and government are up 4.5 percent annually but spending on imports has rocketed. Higher oil prices and soaring imports from China—driven by an undervalued currency and other subsidies—have tapped off much of the growth in domestic spending, and reduced GDP growth to a lackluster 2.5 percent over the past two years.
With growth averaging 2.5 percent, unemployment is likely to rise, because productivity advances about 2 percent a year and labor force expands 1 percent. Better than three percent growth is needed to push down unemployment with some certainty.
Since the beginning of the year, weak jobs growth has dampened consumer spending, and GDP growth has slowed to about 1 percent a year. At that pace, layoffs will soon outstrip new hires, and the economy will tumble into recession if that has not already happened.
When sales are expanding only moderately, firms in areas of rapidly changing technology find ways to accelerate productivity growth, lay off workers and boost profits.
In telecom, wireless carriers are designing phones that are more intuitive to use and require fewer customer calls to help centers. Sprint has slashed call centers from 74 to 44 and cut 20,000 jobs.
Quietly, banking has shifted from brick and mortar to the internet and shed employees, and other regulatory changes are having big consequences—some the Administration might not want to highlight.
President Obama has placed a lot of stock in doubling exports, but to do so America must play its strengths—for example, boost sales in industries like resources, finance and pharmaceuticals.
U.S. resources exports got a lift over the last decade from growth in China and elsewhere in Asia—for example, the Chinese are eating more meat and it takes American corn to feed those cattle and hogs. U.S. building materials—lumber and the like—are in big demand, but energy prices have rocketed too, as Asians drive more cars.
For the U.S. economy, higher energy prices are a bad news story, but could become a good news story with better regulatory policies. Rising global energy prices drive up oil import costs but new sources of natural gas where the Appalachians meet the coastal plain, and oil reserves in the Gulf and in declining on-shore fields become more profitable to develop at $100 a barrel.
Instead of higher priced oil choking growth by driving up import costs and funneling U.S. consumer dollars abroad, higher oil prices could be fueling large, privately-funded infrastructure projects to develop domestic energy, push out imports and develop new exports markets. Sadly, tougher state and federal regulations and absolute bans on developing domestic natural gas and oil are frustrating that potential, and millions of new jobs in construction, cement and steel, energy production, refining and chemicals, and R&D are being sent abroad.
None of that helps the environment. Obsessive regulation merely shifts fossil fuel production from the United States to developing countries where risks are not managed as effectively as in America.
The Enron debacle and similar accounting scandals during the early years of this century inspired the Sarbanes-Oxley law, which greatly increased corporate and bank record keeping costs. Sadly, those costs have not translated into the expected economy-wide benefits, as evidenced by the 2008 financial crisis, which was caused by yet another accounting debacle.
Big banks snookered bond rating agencies into believing mortgage backed securities were sound, and parked those securities offshore in Structured Investment Vehicles by convincing auditors the liabilities of SIVs would not be a claim on bank capital. When the mortgages defaulted and bonds failed, the liabilities of the SIVs nearly busted the big banks.
Now Congress has ladled on Dodd-Frank, but the casino and big bonus culture on Wall Street persists and new problems are popping up. Regulatory compliance costs are higher than ever, and U.S. companies are taking some of their investment banking business offshore.
For example, Initial Public Offerings (IPOs) are significantly less expensive in Europe and a lot of U.S. IPOs are moving across the pond. Like Telecoms, big banks are announcing mass layoffs that will hit the employment numbers over the coming months.
The U.S. pharmaceutical patent and Medicare reimbursement system have greatly incentivized block buster drugs and big advertizing budgets. The business model is simple: find a drug that treats a condition of aging like aching limbs or leaky pipes, set very high prices and drive demand with pricey advertizing. After all, if the old folks will buy it, Medicare has to pay for it.
All that money spent on advertizing doesn’t finance R&D. Now Big Pharma faces lots of brand name drugs going generic, but after squandering so much on TV ads has too few new drugs in the pipeline. Big layoffs have been announced by drug manufacturers.
Bad energy and China trade policies have juiced imports and dampened demand for what Americans buy at home, and poorly conceived industrial policies have left Americans with not a lot to export.
In the media, progressive commentators often lament weak jobs growth is the result of globalization.
Globalization is a challenge, but the Bush and Obama Administrations have not managed trade with China very well—they let the Middle Kingdom’s undervalued currency and other mercantilist policies go unanswered. And globalization lays bare poorly conceived industrial policies that require the American economy to fail.
A failing economy creates few jobs.
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.