The Guest Blog

Morici: Unemployment Falls to 8.5 Percent but that May Be as Good as It Gets

The economy added 200,000 jobsin December, and unemployment rate fell to 8.5 percent. Going forward unemployment is not likely to fall much further and may rise again.

Fourth quarter growth was exceptionally strong as the global economy recovered from first half disruptions such as the earthquake in Japan, but going forward economists expect growth to slow to about 2 percent.

Job growth in the range of 130,000 should be expected to accommodate labor force growth but not much lower the unemployment rate. That is hardly a pace that will restore economic health, or validate President Obama’s heavy intervention in the economy and industrial policies in the upcoming Presidential campaign.

The unemployment rate would be higher but for the fact that many unemployed professionals have established home-based businesses that really don’t provide full time employment but do take workers off the unemployment rolls.

Also, many adults have quit looking for work altogether, and the adult labor force participation rate remains depressed. In December, working age adults not participating in the labor force—those neither employed nor looking for work—increased by 194,000, almost as many as who found jobs.

Strong gainswere notched in retail and wholesale trade, warehousing and transportation, leisure and hospitality, and health care and social services. Manufacturing added 23,000 jobs and construction added 17,000.

Gains in manufacturing production are not accompanied by stronger improvements in employment largely because so much of the growth is focused in high-value activity. Assembly work, outside the auto patch, remains handicapped by the exchange rate situation with the Chinese yuan.

The situation with the yuan is the single largest impediment to more robust growth in manufacturing and its broader multiplier effects for the rest of the economy; the Obama Administration indicated over the holidays it has no intention of challenging China on this issue, and it enjoys the unlikely support of Speaker John Boehner.

Government employment fell by 12,000 as private sector jobs added 212,000. Lower property values translate into lower assessments and property values with considerable lag in most communities, and 2013, the housing recession will dramatically reduce local tax receipts and employment. Coupled with federal budget cutbacks, government employment should fall by about 20,000 a month through the end of 2012.

The private sector less the heavily subsidized health care and social services industries, and temporary businesses services, only added 191,000 jobs. In the months ahead, gains in core private sector employment must improve dramatically if the economy is to halt the decline in real wages and provide federal, state and local governments with adequate revenues, and that is not happening fast enough.

The economic crisis in Europeand mounting problems in China’s housing sector and banks worries U.S. businesses about a second major recession and discourages new hiring. The U.S. economy continues to expand but is quite vulnerable to shock waves from crises in European and Asia.

Factoring in those discouraged adults and others working part time for lack of full time opportunities, the unemployment rate is about 15.2 percent. Adding college graduates in low skill positions, like counterwork at Starbucks , and the unemployment rate is likely closer to 18 percent

Prospects for lowering those dreadful statistics remain slim. The economy must add 13 million jobs over the next three years—360,000 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 about 385,000 a month to accomplish that goal.

Growth in the range of 4 to 5 percent is needed to get unemployment downs to 6 percent over the next several years. In fourth quarter of 2011, the economy grew at about 3 percent but that is expected to slow to 2 percent in 2012.

Growth is weak and jobs are in jeopardy, because temporary tax cuts, stimulus spending, large federal deficits, expensive and ineffective business regulations, and costly health care mandates do not address structural problems holding back dynamic growth and jobs creation—the huge trade deficit and dysfunctional energy policies.

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and trade with China account for nearly the entire $550 billion trade deficit. This deficit is a tax on domestic demand that erases the benefits of tax cuts and stimulus spending.

Simply, 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 2 percent a year instead of the 5 percent pace that is possible after emerging from a deep recession and with such high unemployment.

Industrial policies, like federal bailouts for General Motors and Maryland’s efforts to save an aging steel mill at Sparrows Point won’t fix the jobs market—those just shift employment from more competitive enterprises. Payroll tax holidays are similar bandaids—those buy jobs today at the expense of cutbacks in 2013 and the years that follow.

Without prompt efforts to produce more domestic oil, redress the trade imbalance with China, relax burdensome business regulations, and curb health care mandates and costs, 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.