Why the US jobs outlook remains dismal

Friday, forecasters expect the Labor Department to report the economy added only 90,000 jobs in June, not even enough to keep up with growth in the working age population.

Most analysts see the unemployment rate remaining staying at 8.2 percent, while some anticipate an increase. The wildcard is the number of adults actually working or seeking jobs—the measure of the labor force used to calculate the unemployment rate. Adults who have quit looking and left the labor force altogether are responsible for 99 percent of the reduction in the unemployment rate from 10 percent since October 2009 report.

Many adults have reason to be discouraged—new jobs pay lower wages than did those lost during the recession. Policies, favoring bank consolidation and financial schemes, alternative energy and high technology, and government expansion of health care are hampering jobs creation in core-manufacturing, resources and many service activities. Those policies encourage more off-shoring, push down wages, pad big bonuses and dividends, and skew income toward the wealthiest in Manhattan, the Silicon Valley and other bastions of privilege.

Specifically, over the last three months wage income, as measured by the Commerce Department, grew at a 1.4 percent annual pace—much less than anticipated inflation—while interest and dividend income advanced nearly 10 percent.  Polices like Dodd-Frank are pushing regional banks, which finance small business jobs creation, to sell out to Wall Street giants. Favoritism in tax arrangements toward private equity and other investment schemes are thumbing down wages on Main Street and raising bonuses and dividends on Wall Street.

The economy expanded at an anemic 1.9 percent annual pace during the first quarter, and a good deal of that growth was momentum in consumer spending, as households took on more long-term debt to finance autos and higher education.

Consumers cannot continue taking on debt in the manner of the boom years of the 2000s—auto purchases have likely peaked, and don’t look for universities to recruit any more reluctant students taking shelter from a tough job market. The word is out—borrowing for graduate education often doesn’t pay out!

Retail sales in April and May declined, and forecasters don’t expect much bounce when June data are released later this month. Businesses are more cautious about investing in new facilities and adding workers, because consumers are so tight fisted, a prolonged recession in Europe seems likely, and the Chinese economy is weakening.

Second quarter economic growth is likely to be less than two percent, and new jobs created won’t be enough to keep up with population growth. The most effective jobs program will remain convincing adults they don’t want or need a job. If the adult labor force participation rate were the same today as when Barak Obama became president, unemployment would be 11 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 nearly 15 percent.

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.

The economy must add 13 million jobs over the next three years—362,000 jobs each month—to bring unemployment down to 6 percent. GDP would have to increase at a 4 to 5 percent pace—something that is possible after a long deep recession save for chronically weak demand for US 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 US exports are demand for American made goods.

The bottom line: cutting the trade deficit in half would increase GDP, including multiplier effects, by some $500 billion, create 5 million jobs.