Friday, forecasters expect the Labor Department to report the economy added 150,000 jobs in May—better than the 115,000 in April but well below the 229,000 monthly pace for the first quarter. Economic growth and jobs creation are slowing, and that may take unemployment higher in the months ahead.
Initial estimates indicate the economy expanded at a 2.2 percent annual pace in the first quarter, down from 3.0 percent the prior period, but a good deal of recent growth was momentum in consumer spending, as households took on more long-term debt to finance autos and higher education, and business inventory investments, as many firms miscalculated sales and overstocked.
Consumers cannot continue to increase debt in the manner of the boom years of the 2000s, and inventory purchases will moderate—auto purchases have likely peaked or reached a plateau, and don’t look for universities to recruit any more reluctant students taking shelter from a tough jobs market. The word is out—borrowing for graduate education often does not pay off!
Consumers and investors are more cautious as the crisis in Greece threatens a prolonged recession in Europe, and the Chinese economy faces new challenges. Retail sales in April inched up only 0.1 percent, and forecasters are expecting only modest 0.3 percent increase for May. Investors are crowding into Treasuries and consumer staples, which pay modest dividends but tend to lose less value in a recession.
Second quarter economic growth is likely to be less than two percent, and fewer than 200,000 jobs should be added each month. New jobs created will hardly be enough to replace all those lost during the Great Recession and provide opportunities for new graduates looking for work.
During the recent recovery, the most effective jobs program has been to convince adults they don’t want or need a job. Virtually, the entire reduction in the unemployment rate from 10 to 8.1 percent has been from adults quitting the labor force.
The percentage of adults participating in the labor force—those employed, self employed, or unemployed but looking for work—has declined significantly. If the adult participation rate was the same today as when Barak Obama became president, unemployment would be 11 percent.
Adding adults on the sidelines, who say they would reenter the labor market if conditions improved, and part-time workers, who would prefer full-time positions, the unemployment rate becomes 14.5 percent. Factoring in college graduates in low skill positions, like counter work at Starbucks, and unemployment is much higher still.
Longer term, the economy must grow 3 percent annually to keep unemployment steady, because advances in technology permit labor productivity to increase 2 percent each year and population growth pushes up the labor force about 1 percent.
If conditions are mediocre and businesses cautious about productivity growth can slip—equipment and computers are kept beyond their economically useful lives. Then unemployment can be kept steady with 2 percent growth but that is a recipe for stagnation and decline, as other economies—read China, India and Korea—invest in new products and methods and increasingly own the intellectual capital that once powered high American standards of living and supported the middle class.
Also, the economy growing at 2 percent is like an airplane flying at low altitude. The plane can keep going, but the slightest unexpected obstacle and the plane ditches. Moreover, the quality of jobs growth is poor, and young people can’t start meaningful careers.
The economy must add 13.3 million jobs over the next three years—370,000 jobs each month—to bring unemployment down to 6 percent. 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.
Economists agree weak demand is holding down economic growth, and the $620 billion trade deficit is the biggest problem. Oil and trade with China account for nearly the entire trade gap, and each dollar sent abroad to purchase oil and Chinese goods that do not return to purchase U.S. exports are demand for American made goods.
Cutting the trade deficit in half would increase GDP, including multiplier effects, by some $500 billion, create 5 million jobs.
Peter Morici served as Chief Economist at the U.S. International Trade Commission from 1993 to 1995. He is an economist and professor at the Smith School of Business, University of Maryland.