The US Labor Department employment figures for August, to be released on
Friday, are likely to report another 200,000 jobs lost, according to the
consensus forecast, following the 247,000 lost to the economy in July.
Unemployment was 9.4% in July, and professional forecasters expect it to surge
to 9.6% for August. My forecast indicates it will pierce 10% by year end.
Factoring in adults that have left the labor force and those who work part time
but would prefer full-time jobs, the unemployment rate is greater than 17%.
From December 2007 through July 2009, the economy lost 6.7 million jobs. The
recession has wiped out all the jobs created in
the private sector over the past decade.
Construction and manufacturing shed 1.4 million and 2.0 million jobs,
respectively, as the credit market meltdown and trade deficit wrecked havoc on
residential construction and manufacturing. Layoffs then spread to commercial
construction, finance, retail sales, and other sectors.
The economy contracted in the second quarter at a modest 1.0%, but should
register positive gross domestic product (GDP) growth in the second half in the
range of 2%.
Consumer spending, residential construction and technology sales are gaining.
Both the technology sectors and materials should benefit from stronger demand
powered by growth in Asia.
The stimulus package should raise GDP by about 2.5 percentage points in 2010
and 2011 and add about 3 million jobs. Most of those jobs will be temporary and
3 million and not be enough to replace the more than 7 million that will be
lost before the recession ends.
With productivity growing at least 2% a year and the working aged population
increasing 1% a year, GDP growth must exceed 3% to bring down unemployment.
Unless the Barack Obama administration addresses the structural problems that
caused the recession - management issues at the banks and huge trade deficits
on oil and with China - the recovery will not generate strong enough growth to
bring down the unemployment rate.
Regional banks are now laboring under the weight of commercial real estate
failures. Unable to effectively access money center capital markets, regional
banks are short on funds to lend to small and medium sized businesses.
As the stimulus package pushes up government and consumer spending, the trade
deficits on oil and with China will grow. This will tax aggregate demand for US
made goods and services and limit job gains.
Consequently, as the economy expands, businesses will struggle to find enough
capital, and the trade deficits will create a shortage of demand for US goods
and services and new layoffs will begin once the stimulus spending ends.
President Obama's near-term energy policies address mostly the more efficient
use of domestic coal and natural gas and alternative energy sources to generate
electricity, and will do little to quickly reduce oil imports. Increased
mileage standards for cars and trucks will not have a meaningful impact on the
value of oil imports for several years.
Obama, like George Bush, emphasizes diplomacy to persuade China to stop
subsidizing exports, undervaluing its currency through currency market
manipulation and blocking imports. It remains to be seen whether he will get
serious about China's biggest unfair trade practice - its undervaluation of the
yuan by some 40%.
In Friday's jobs report, the key variables to watch are: Jobs creation - On August 7, the Labor Department reported the
economy lost 247,000 payroll jobs in July. The government sector added 7,000
jobs, and the private sector lost 252,000.
With a slowly accelerating economic expansion, job losses will continue for
several more months, and total losses will exceed 7 million before the
hemorrhaging ends.
Unemployment - In July, the unemployment rate, as computed by the
Labor Department, was 9.4%, and is expected to rise to at least 9.6% for June.
According to my forecast, unemployment will peak at 10.3% late in 2010 or early
2011.
Since 2001, more adults have chosen not to seek employment owing to worsening
labor market conditions. If labor force participation today were at the same
level as when president George W Bush took the helm, the unemployment rate
would be about 12%. The difference is that discouraged workers who have quit
looking for work are not counted by Labor Department when computing the
unemployment rate. Add in part-time workers who would prefer full-time
employment, and the hidden unemployment rate is above 17%.
Business vs government payrolls - In July, government employment
rose 7,000, and since the recession began in December 2007, it is up by
195,000.
Importantly, state and local government employment has risen by 110,000 since
the recession began. The emphasis in Obama administration stimulus spending on
shoring up state and local government employment is misplaced, and the money
would be better spent encouraging private-sector employment through
infrastructure projections and incentives for private spending on domestic
manufacturers.
Construction - In July, construction lost 76,000 jobs. Since
construction employment peaked in October 2006, the sector has lost 1.4 million
jobs.
Retailing - The retail trade has shed 843,000 jobs since November
2007, and lost 44,000 jobs in July.
Finance and insurance - During the economic expansion finance and
insurance, along with technology sectors, offered some of the best new job
opportunities, outside of healthcare and technology-related activities. Since
December 2007, finance and insurance has shed 332,000 jobs, and 13,000 in July
alone.
Manufacturing - In July, manufacturing lost 52,000 jobs. The
dollar remains overvalued against the yuan and other Asian currencies, and the
large trade deficit with China and other Asian exporters is a key factor
pushing down US manufacturing employment.
Peter Morici is a professor at the Smith School of Business, University
of Maryland, and former chief economist at the United States International
Trade Commission.
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