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The real reason unemployment is going down

 

The economy added only 120,000 jobs in March—not even enough to keep up with normal population growth. Unemployment rate fell to 8.2 percent, simply because many unemployed adults became discouraged and quit looking for work.

Fourth quarter economic growth was exceptionally strong as the global economy recovered from first half disruptions such as the earthquake in Japan, but first quarter growth has been slower. Construction—both commercial and single unit residential have been hard hit—and now auto sales are slipping.

Manufacturing added 37,000 jobs, but that sector’s strong recovery should be generating more gains. Elsewhere jobs gains were weak and generally down from February.

Construction shed 7,000 jobs and retailing lost 34,000 employees, as stalwarts like Sears, J.C. Penny’s and Best Buy face considerable challenges.

Gains in manufacturing production have not instigated 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. And concerns about the durability of the recovery and health care costs when ObamaCare is fully implemented make employers very cautious about adding to headcount.

Overall, 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 it has no intention of challenging China on this issue, but presumptive GOP standard bearer Mitt Romney promises a harder line.

Government employment fell by 1,000 as private sector jobs added 121,000. Lower property values translate into lower assessments and property values with considerable lag in most communities, and in 2012 and 2013, the housing recession will significantly impact local tax receipts and employment. Coupled with federal budget cutbacks, government employment should continue falling.

The private sector less the heavily subsidized health care and social services industries, and temporary businesses services, only added 98,000 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 Europe and 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 14.5 percent. Adding college graduates in low skill positions, like work behind the counter at a Starbucks, and the unemployment rate is likely closer to 18 percent

Prospects for lowering those dreadful statistics remain slim. The economy must add 13.0 million jobs over the next three years—362,000 each month—to bring unemployment down to 6 percent.

Growth in the range of 4 to 5 percent is needed to get unemployment down to 6 percent over the next several years. In the fourth quarter of 2011, the economy grew at about 3 percent but that is expected to slow to 2.5 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.

Oil and trade with China account for nearly the entire $600 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 Band Aids—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 School, 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.