Morici: The Economy and Jobs — A Glass Half Full or Half Empty?
Friday, forecasters expect the Labor Department will report the economy added only 90,000 jobs in October, after scoring a moderate 103,000 gain in June. Though an improvement over May to August, when jobs creation averaged only 64,000, this is not enough to keep up with labor force growth.
The unemployment rate remained steady at about 9.1 percent through this period, despite sluggish growth and lackluster jobs creation, and going forward it may begin to inch up.
The question remains is the glass half full—the economy showing new signs of life as indicated by preliminary data for third quarter GDP growth at 2.5 percent—or is it half empty—the economy creating too few jobs and growing too slow to be self sustaining?
The Case for Optimism
Consumer spending and economic growth have picked up in recent months. The preliminary GDP report indicates the economy expanded at a 2.5 percent rate in the third quarter, and the gains in demand were broad based. Consumer spending is up decently, as is business investment. Inventories have been cycling down, indicating some rebuild is likely in the fourth quarter and adding to optimism for stronger second half growth than the very weak, less than 1 percent, recorded during the first half.
Auto saleshave firmed. Businesses and commuters faced strong financial incentives to replace cars and trucks as the vehicle fleet grew older during the Great Recession, and in the early months of the recovery, buyers remained cautious. While impulse buying and lifestyle statements are not prevalent in showroom interest, the math for buying as opposed to refurbishing many vehicles is solid.
Many homeowners are underwateron their mortgages, but that condition has persisted for several years, and households have ways to readjust their balance sheets. For example, many have worked down credit card balances and realigned patterns of durable goods use. Many have reconfigured after what was a permanent hit to their wealth—lower real estate values; hence, with household asset situations realigned, even if not adequately recovered, consumers are returning to the malls. Consumers remain cautious, but they are not behaving as if fearing another economic collapse.
Housing construction is rebounding a bit, but it is not your father’s boom. Increasingly, the activity is in multi-family dwellings, as households become reconciled to permanently higher gas prices, flat housing values and living closer to work—renting looks better for young couples who may be compelled to move for jobs or changes in family situations over the next several years.
Though the overhang of supply of single family units continues, many existing homes are too far from employers and too large. Hence, multi-family building activity increases, and this improves, albeit from low levels, demand for construction materials and workers in the building trades.
Reasons for Pessimism
The economy must grow at about 2.5 to 3 percent—long term—to keep unemployment steady. Simply, potential labor productivity rises, thanks to better technology, about 2 percent each year, and labor force growth is about 1 percent a year, owing to natural population increase. Together, those translate into a 3 percent trend rate of economic growth with unemployment steady.
If conditions are poor and businesses are pessimistic, productivity growth can slip—equipment and computers are kept beyond their economically useful life. Then unemployment can be kept steady with 2.5 percent growth or even 2 percent but that poses risks.
Anecdotal reports indicate that businesses are cutting back. They don’t expect a recession but are gearing for persistent subpar growth in the United States, slower growth in Asia and virtually no growth in Europe. Reflecting this assessment, companies like United Technologies, Honeywell and others have announced plans to cut costs further, even as they meet modestly growing demand. That means lower head counts, which could start a negative feedback cycle.
The U.S. economy moving along at 2 or 2.5 percent growth is like an airplane flying at low altitude. In a steady environment, the plane can keep going, but the slightest downdraft, never mind an unexpected tall obstacle, and the plane ditches. And a tall obstacle may soon emerge across the pond.
The Europeans have within their grasp the tools to handle the sovereign debt crisis but huge budget cuts and higher taxes, absent the use of compensating monetary policy, is the path to disaster. European leaders must agree to use the European Central Bank to recapitalize banks, and provide better direct assistance to rehabilitate the Greek and other troubled economies, or the Mediterranean economies will collapse and take the richer countries with them.
The various conditions being imposed on Greece and others, and the structures being created, such as the European Financial Stability Fund , are poor substitutes for the kind of support the Fed provided during the U.S. mortgage-backed securities crisis. European leaders know it, but as with so many issues, they prefer to muddle through rather than accept obvious and politically painful choices until compelled. Hopefully, they will change course before it is too late.
Half Full or Half Empty?
Even if the Europeans manage to avoid disaster, the U.S. unemployment rate will not improve much. It will likely remain steady at 9.1 percent or edge up next year. It would be higher but for the fact that many adults have become discouraged and quit looking for work.
The economy must add 13.4 million jobs over the next three years—373,000 each month—to bring unemployment down to 6 percent. Considering continuing layoffs at state and local governments and federal spending cuts, private sector jobs must increase at least 400,000 a month to accomplish that goal.
GDP growth in the range of 4 to 5 percent is needed to get unemployment down to 6 percent over the next several years. The outlook for 2012 indicates growth in the range of 2 or 2.5 percent, and that puts the economy at severe risk to any kind of shock—financial panic in Europe, oil price spike or even a prolonged government shutdown from failed budget negotiations.
Growth is weak and jobs are in jeopardy, because temporary tax cuts, stimulus spending, and easy monetary policy are not enough to address the chronically weak demand holding back economic recovery. Large trade deficits overwhelm the positive effects of Washington’s efforts to jump start the economy.
Oil and trade with China account for nearly the entire $550 billion trade deficit, and dollars sent abroad to purchase oil and consumer goods from China that do not return to purchase U.S. exports are lost purchasing power. Consequently, the U.S. economy is expanding at about 2 to 2.5 percent a year instead of the 5 percent pace that is possible after emerging from a deep recession and with such high unemployment.
Without prompt efforts to produce more domestic oil, redress the trade imbalance with China and the rest of Asia, the U.S. economy cannot grow and create enough 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.