Friday, forecasters expect the Labor Department to report the economy added 165,000 jobs in April—better than the 120,000 in March but well below the 212,000 pace for the entire first quarter. Economic growth and jobs creation are slowing, and that may take unemployment higher.
The economy expanded at a 2.2 percent annual pace in the first quarter, down from 3.0 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.
Second quarter economic growth is likely to be much 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. Some 80 percent of the reduction in the unemployment rate from 10 to 8.2 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 Barack Obama became president, unemployment would be 10.7 percent.
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 14.5 percent. Factoring in college graduates in low skill positions, like counterwork 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, 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 poses risks.
An economy that is 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—such difficulties may soon emerge in Europe or China.
The economy must add 13 million jobs over the next three years—362,000 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.
Oil and trade with China account for nearly the entire $621 billion trade deficit, and dollars sent abroad to purchase oil and Chinese goods that do not return to purchase U.S. exports are lost purchasing power. Consequently, the U.S. economy is growing at about 2.5 percent instead of the 4 to 5 percent pace that is possible after a long and deep recession.
Cutting the trade deficit in half would increase GDP, including multiplier effects, by some $500 billion and create 5 million jobs.
Peter Morici is an economist and professor at the Smith School of Business, University of Maryland School, and an independent columnist. Follow him on Twitter@pmorici1.