Friday, forecasters expect the Labor Department will report the economy added 167,000 jobs in May. This is in line with the pace of recent months but hardly enough to lower unemployment down to acceptable levels.
In the first quarter, GDP was up only 2.4 percent, due to stronger consumer spending and an inventory bounce.
Despite greater optimism as expressed by consumers and small businesses in polls, in March and April consumer spending, industrial production, business inventories and manufacturing slowed.
Consequently, economists expect second quarter growth to be below 2 percent despite the recent euphoria generated by surging home sales.
Home prices were juiced by rock bottom mortgage rates that have since risen, and it is important to remember those asset transfers at higher prices only impact on GDP and employment to the extent those drive up consumer spending and new home construction. The former has not happened, and although home building is up, housing construction is only 3 percent of GDP.
Bottom line: a more robust economy can drive housing but surging housing prices are no panacea for what ails the economy and jobs market.
Since turning the corner in mid 2009, GDP growth has averaged 2.1 percent and unemployment has fallen from 10.0 percent to 7.5 percent.
In contrast, when high oil prices and double digit interest rates pushed unemployment to 10.8 percent during Ronald Reagan’s first term; then GDP growth averaged 5.0 percent and unemployment fell to 7.0 percent.
The economy must add more than 365 thousand jobs each month for three years to lower unemployment to 6 percent. That would require growth in the range of 4 to 5 percent and is not likely with current policies.
Factors contributing to the slow pace of recovery include the huge trade deficits on oil and manufactured products from China and elsewhere in Asia—these drain demand for U.S. goods and services.
Absent U.S. policies to effectively confront Asian governments about their purposefully undervalued currencies, and to develop more oil offshore and in Alaska, the trade deficit will continue to tax growth.
The recent surge in natural gas production, and accompanying lower prices, is substantially improving the competitiveness of energy-using industries like petrochemicals, fertilizers, plastics, and primary metals—as well as their consuming industries like industrial machinery and building materials.
However, Department of Energy efforts to boost exports of liquefied gas will reduce the trade deficit and boost growth much less, and create many fewer jobs, than keeping the gas in the United States for use by energy-intensive industries.
Dodd-Frank regulations make mortgages, refinancing, and home improvement loans much more difficult to obtain. The recovery in housing construction, though welcomed, remains lackluster as compared to past recoveries. In turn, this slows expansion in building materials, major appliances, furniture and other durable goods.
The high cost and slow pace of regulatory reviews are a constant complaint among businesses and dampen investment spending. Government needs to subject policies to protect the environment and other regulatory goals to the same efficacy standards the market applies to commercial technologies—regulatory assessments and enforcement are needed but those must be delivered cost effectively and quickly to add genuine value.
Many businesses with overseas opportunities remain tentative about adding capacity and hiring workers in the United States. Instead, they look to Asia where government policies are more accommodating and prospects for growth remain stronger.
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.