Overall, the economy must add more than 13 million jobs to bring unemployment down to 6 percent by the end of 2013. With state and local governments facing tough financial constraints, the private sector must add at least that many jobs to accomplish the task.
Accounting for productivity, population growth and labor force reentry, the economy and private business sector must grow at better than 3 percent a year to bring unemployment down, and that is a tough challenge.
GDP growth in the first quarter was 3.2 percent but inventory adjustments accounted for about half that growth. Private demand—private consumption, investment and net exports—only added about 1.6 percent percentage points. Government spending, even with stimulus disbursements, subtracted 0.4 percentage points from growth.
Businesses need customers and capital to invest in new facilities and create jobs.
Slow growing private demand—less than 2 percent—is the big problem.
Consumers are spending again but at a more moderate pace and are not likely to return to their free wheeling borrowing of years past. Auto sales are recovering but will not reach precession levels for many years.
The construction sector is suffering from an overhang of too many homes, stores and offices built on cheap credit and speculation during the boom. Many structures sit on overvalued land, and inevitable and necessary adjustments in real estate values are slowed by Obama Administration efforts to provide mortgage relief and prop up housing values.
The trade deficit—in particular, huge imports of oil and the imbalance with China—cuts a huge hole in demand for U.S. goods and services. Without addressing trade deficits on oil and with China, creating enough new jobs will be a daunting, likely impossible, task.
Detroit has the technology to produce much more efficient gasoline-powered vehicles now, and the United States has much undeveloped oil and natural gas—both on shore in the lower 48 states, and off-shore and in Alaska. A shift in national policy to much more rapidly build fuel efficient vehicles and tap domestic energy would push out imported oil and create many new jobs.
China maintains an undervalued currency that makes its products artificially cheap and deceivingly competitive on U.S. store shelves, and it practices virulent protectionism against U.S. exports.
President Obama promised to address currency manipulation during his campaign for the White House but has done little substantive since. Secretary Geithner during his confirmation hearings acknowledged the problem but since has demonstrated little grasp of the nature, scope or solutions to the problem.
Treasury has postponed its report on foreign government currency management practices. As stated policy, Beijing intervenes in currency markets to boost exports, fire industrial development and selfishly transfer manufacturing to China, creating unemployment in North America and Europe. A reenactment of Smoot-Hawley, China’s mercantilism transfers the hangover from the Great Recession to western nations.
It is high time for President Obama and Secretary Geithner to quit the hand wringing, name China a currency manipulator, and implement specific, comprehensive, macroeconomic policies to counter China’s cynical abuse of free trade.
Regarding capital to finance business expansion, regional banks, which serve small and medium sized businesses, remain burdened by failing commercial real estate loans and mortgage-backed securities. The TARP was intended to remove many of those from their books but has often been abused. A Savings and Loan Crisis era Resolution Trust could relieve them of troubled loans, earn a profit for the government, and give small and medium sized businesses adequate bank credit again.
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.