Our Economy Is Teetering On the Brink of Recession

Friday forecasters expect the Labor Department to report the economy added only 65,000 jobs in September—my estimate is 80,000. Either would be much less than the 130,000 needed for the economy to stay even with adult population growth.

Overall, GDP and employment are growing more slowly than the adult population, and the private sector is much smaller than before the Great Recession—even with big boosts in federal subsidies for private health care and federal mandates for large health care spending by the states.

Employment grew in the second and third quarters despite very slow GDP growth, because labor productivity fell the first half of 2011. Consequently, real wages, per capita income and living standards are dropping—all exacerbated by hungry state and local tax collectors who refuse to tighten belts as quickly as households and businesses.

A downsizing private sector, falling productivity per capita GDP, and a shrinking share of the adult population employed or even seeking employment are ominous signs of economic decline.

Near term, employment in health care, retail, and manufacturing should post modest gains, and construction should exhibit some bounce because it fell to such low levels during the recent recession.

State and locals governments will continue to shed jobs, because state of payments for Medicaid services are rising too rapidly and a downsized private sector generates too few tax receipts—together those shrink resources available for other public services. The alternative is for higher state and local taxes to further choke the growth of regional economies.

The economy must add 13.7 million jobs over the next three years—381,000 each month—to bring unemployment down to 6 percent. Considering layoffs at state and local governments and likely federal spending cuts, private sector jobs must increase at least 405,000 a month to accomplish that goal.

Growth in the range of 4 to 5 percent is needed to get unemployment down to 6 percent, and growth in the range of 2 is likely. Hence, either more unemployed adults choose to quit looking for work and leave the labor force altogether, or the unemployment rate rises.

Were discouraged workers and adults working part-time because full time positions are not available are considered, the unemployment rate would be 16.2 percent. Adding in recent college graduates who cannot find suitable positions, underemployed by working at venues like Starbucks, unemployment rises to 20 percent.

Moreover forecasts for growth at 2 percent are tenuous—all the risk is to the downside as a disruption of banking in Europe or a new wave of consumer pessimism in the United States could thrust the economy into recession and easily raise unemployment to 15 percent. No federal initiative would readily hoist the economy out of such a hole, and Great Depression like conditions would spread through large parts of the country.

Jobs creation remains weak, because the U.S. economy suffers from inadequate demand for what Americans can make. Temporary tax cuts and stimulus spending, costly health care mandates, and tighter but ineffective business regulations do not address this problem, and indeed exacerbate, the permanent structural problems suppressing demand and holding back economic growth and jobs creation—dysfunction energy and trade policies that cause a huge trade deficit.

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. Proposed free trade agreements will create about as many imports and new exports and on a net basis destroy jobs because U.S. imports are more labor intensive than exports.

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 and cannot be spent on U.S. made goods and services. Consequently, the U.S. economy is expanding at less than 1 percent a year instead of the 5 percent pace that is possible after emerging from a deep recession and with such high unemployment.

America is not playing its advantages well. The United States has substantial untapped oil and gas resources that will be needed for a least the next decade, until electric vehicles can appreciably dent oil imports.

Strengths in finance, telecom and backbone technologies, pharmaceuticals, aerospace and autos, and other industries are not generating exports as much as those are creating offshore jobs. Excessive government regulations and a more business friendly environment in Asia are attracting jobs that could be cost-effectively located in the United States.

Without prompt efforts to redress the trade imbalance with China, produce more oil and gas, and curtail costly health care and business regulations that are encouraging outsourcing, the U.S. economy cannot grow and create enough jobs.

Weak demand, excessive and ineffective regulation, and the generally apologetic and pessimistic outlook offered by President Obama and Treasury Secretary Geithner depress consumer and business confidence. -- As does the constant budget wrangling between Republicans and Democrats on Capital Hill.

Until Washington policy dysfunction ends, the economy will continue to grow slowly or slip into recession, unemployment will rise, living standards will fall, and American standing in the global economy will decline.

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.