GDP contracts, jobs outlook sours

By PETER MORICI, UPI Outside View Commentator   |   Jan. 30, 2013 at 9:37 AM   |   Comments

COLLEGE PARK, Md., Jan. 30 (UPI) -- The U.S. Commerce Department reported gross domestic product fell 0.1 percent in the fourth quarter 2012. Weak conditions abroad and flagging U.S. competitiveness caused exports to contract $27 billion and businesses anticipating a further slowdown slashed inventories by $40 billion.

Friday, forecasters expect the U.S. Labor Department to report the economy added 160,000 jobs in January. However, employment tends be a lagging indicator and flat or negative GDP growth will cause unemployment to rise sharply in the months ahead.

The tax-and-spending package implemented Jan. 1 reduces prospects for improved growth and jobs creation, as the U.S. economy and workers continue to suffer from insufficient demand.

Factors contributing to weak demand and slow jobs growth include the huge trade deficits with China and other Asian exporters of manufactures and on oil. Absent U.S. policies to confront Asian governments about their purposefully undervalued currencies and to develop more oil in the eastern Gulf of Mexico, off the Atlantic and Pacific coasts and in Alaska, the trade deficit and its drain on growth will worsen.

The recent surge in natural gas production, and accompanying lower prices, has the potential to substantially improve the international competitiveness of industries like petrochemicals, fertilizer, plastics and primary metals -- as well as consuming industries like industrial machinery and building materials.

However, the U.S. Department of Energy is considering proposals to boost exports of liquefied gas -- a costly and environmentally risky process. That would reduce the trade deficit and boost growth less, and create many fewer jobs, than keeping the gas in the United States for use by energy-intensive industries.

In 2013, virtually every wage earner is paying higher payroll taxes and the recent budget deal raises income taxes $40 billion to $50 billion, annually, mostly from higher rates on families earning more than $450,000. Together, those further dampen consumer spending and aggregate demand.

On the supply side, increased business regulations, rising healthcare costs and mandates imposed by ObamaCare and higher tax rates on small businesses raise the cost of capital.

With President Barack Obama's choices for key second-term Cabinet and high-level administration posts falling into place, small businesses have much more certainty -- the assurance of more burdensome regulations, even higher healthcare costs and the prospects of further tax increases to cope with spending and deficit issues in Washington. All those will further tax investment, growth and jobs creation.

Households are reporting pessimistic expectations about the job market. The Conference Board survey of consumer confidence was down significantly in January, in large measure because respondents reporting jobs hard to find rose to 38 percent and those anticipating their incomes to decline increased to 23 percent.

The U.S. economy must add more than 358,000 jobs each month for three years to lower unemployment to 6 percent and that isn't likely with current policies. That would require growth in the range of 4-5 percent. Without better trade, energy and regulatory policies, and lower healthcare costs and taxes on small businesses, that is simply not going to happen.

Most analysts see the unemployment rate for January steady at 7.8 percent but the wildcard remains the number of adults actually working or seeking jobs -- the measure of the labor force used to calculate the unemployment rate.

Labor force participation is lower today than when Obama took office and the recovery began and, factoring in discouraged adults and others working part-time who would prefer full-time work, the unemployment rate is 14.4 percent.

Though Congress has postponed Sequestration, the posture taken by the president in negotiations with Speaker John Boehner, R-Ohio, indicates the administration and Democratic lawmakers have little interest in substantially curbing spending on healthcare and other entitlements.

The likelihood of a downgrade in the U.S. credit rating by Moody's is significant and rising and this weighs heavily on the investment plans of many U.S. multinational corporations. Those can invest and create jobs in Asia, where national policies better favor growth, instead of the United States where higher taxes, spending and deficits are out of control.

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(Peter Morici is an economist and professor at the Smith School of Business, University of Maryland School, and a widely published columnist. Follow him on Twitter: @pmorici1)

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(United Press International's "Outside View" commentaries are written by outside contributors who specialize in a variety of important issues. The views expressed do not necessarily reflect those of United Press International. In the interests of creating an open forum, original submissions are invited.)

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