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What Can We Expect From the First Jobs Report of 2012?

Friday, forecasters expect the Labor Department to report the economy added 150,000 jobs in December, after gaining 120,000 in November. In 2012, weaker jobs gains are likely as consumer spending and economic activity slow.

Unemployment is expected to rise to 8.7 percent from 8.6 the prior month, as some of the 487,000 who stopped looking for work in November return to the job market.

Adding adults on the sidelines who say they would re-enter the labor market if conditions improved and part-time workers who would prefer full-time positions, the unemployment rate becomes 15.6 percent. 

Factoring in college graduates in low skill positions, like counterwork at Starbucks, and the unemployment rate is closer to 20 percent.

Without assertive efforts to address structural problems—huge trade deficits with China and on oil, and expensive and ineffective regulations in banking and health care—the country is headed for years of high youth unemployment and permanent displacement of many older workers. These conditions are not destiny—solutions are at hand but better leadership from the White House and more willingness to compromise in Congress are required to turn country around.

Too Little Economic Growth

Fourth quarter GDP growth will likely register at about 3 percent. Stronger consumer spending, aided by more business investment, exports and home construction, should be the high point.

In recent months, household spending has outpaced income growth, debt is piling up, and some pullback in consumer activity in inevitable. Unlike the years prior to the financial crisis, households will not be able to refinance credit card debt and auto loans by further mortgaging homes, and rising debt service will compel consumers to slow down in 2012.

Much has been made of the need to rebuild household balance sheets—that requires working down credit card debt and mortgage balances. The former was largely completed last April. Now, household net worth and liquidity cannot improve much further without existing homes prices rising; however, those continue to decline and millions of foreclosures will keep the market oversupplied for several years.

Overall, economic growth at about 2 percent—and certainly not better than 2.5 percent—can be expected in 2012

Jobs Outlook

The economy must grow at 2.5 to 3 percent—long term—to keep unemployment steady, because new technology and better methods permit labor productivity to increase 2 percent each year and natural population increases pushes up the labor force about 1 percent.

If conditions are mediocre and businesses cautious, 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.

Many businesses remain reluctant to hire. They don’t expect a recession but are gearing for persistent subpar growth in the United States, slower growth in Asia and a recession in Europe. Many firms will meet modestly growing demand with smaller workforces—exploiting labor saving strategies to boost profits. Lower head counts could ignite a negative feedback cycle—fewer employees at enough firms would instigate lower spending and less demand for all firms and then layoffs would cascade.

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 unexpected obstacle and the plane ditches. A tall obstacle may soon emerge in Europe or China, which both face formidable changes in 2012.

Overall, if the recovery is not derailed, continue to expect jobs growth of about 120,000 a month, and unemployment to gradually creep up to 9 percent by the middle of the year.

New Policies Needed

The economy must add 13.1 million jobs over the next three years—364,000 each month—to bring unemployment down to 6 percent. Factoring in continuing layoffs at state and local governments and federal spending cuts, the private sector must add about 400,000 jobs a month. To create that many jobs, GDP would have to increase at a 4 to 5 percent pace—that is possible after a long deep recession but for chronically weak demand for U.S. made goods and services.

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 4 to 5 percent pace that is possible after a long and deep recession.

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.

Moreover, without curbing a Washington regulatory bureaucracy out of control and skyrocketing health care costs, the cost of doing business in America will remain too high and most new jobs will not pay wages high enough to stop the erosion in living standards for working Americans.

Peter Morici is a professor at the Smith School of Business at the University of Maryland and former chief economist at the U.S. International Trade Commission. Follow him on Twitter@pmorici1.

Peter Morici is an economist and professor at the Smith School of Business, University of Maryland, and widely published columnist. He is the five time winner of the MarketWatch best forecaster award. Follow him on Twitter @PMorici1.