COLLEGE PARK, Md., May 5 (UPI) -- Economists expect the U.S. Labor Department will report the U.S economy added 185,000 jobs in April, after adding 194,000 and 216,000 in February and March. While stronger than in prior months, jobs growth remains too weak and the economy is in danger of slipping into a second recession.
Longer term, the nation faces fundamental structural problems that neither political party seems willing to address in a comprehensive and systemic fashion.
In the first quarter, bad weather slowed construction activity, rising gas and healthcare prices tapped off consumer dollars and weakened demand in other sectors and defense and state and local government spending slowed. Gross domestic product growth was a paltry 1.8 percent -- much less than economists forecasted in January -- and well below the minimum sustainable rate.
Growth less than 2 to 2.5 percent isn't sustainable, because many businesses can meet such modest growth in demand by improving productivity and laying off workers to maintain margins in the face of rising energy and other commodity prices. Layoffs slice household income and a negative cycle of reduced spending begins.
Indeed, the four-week moving average for new unemployment claims moved up to 408,000 for the week of April 23 from 390,000 the week of April 2 -- a rate below 350,000 is consistent with a strong economy and above 400,000 is perilously close to recession levels.
Without stronger growth in the second quarter, the economy will cycle down into recession -- it can't likely continue to drag along at about 2 percent.
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Outlook for second quarter growth
For the second quarter, the glass may be half empty or half full, depending on perspective.
Gas prices continued to surge in April and May and initial private surveys of chain store activity indicate higher gas prices dampened Easter spending -- we will get a clearer picture May 12, when the U.S. Commerce Department publishes preliminary April retail sales.
The housing market remains a drag and the full impact of the earthquake in Japan won't be felt until the end of May. Healthcare costs continued rising, eroding purchasing power and state governments are taxing more and spending less.
On the positive side, commercial construction should rebound, defense spending will pick up and exports should get a lift from a weaker dollar. The auto sector is exhibiting remarkable strength -- GM is boosting market share and Ford technology is commanding premium prices.
Overall economists are expecting growth in the range of 3 to 3.5 percent -- but they had similarly strong expectations about the first quarter in January. However, economists have had difficulties assessing the full consequences of rising gas prices, erosion in market shares from surging Chinese exporters, the budget woes in Washington and the state capitals and festering sovereign debt problems in Europe.
Stay tuned -- weather will be warmer but that is about the only certain forecast for the second quarter.
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Importance of core private sector jobs
Until February, the private sector was creating few permanent jobs. Most jobs were either in healthcare and social services, which enjoy heavy government subsidies, or temporary business services. Excluding those activities, the "core" private sector gained 183,000 and 157,000 jobs in February and March; whereas during the prior 13 months, the average gain was 47,000.
Core private sector jobs have the potential to set off a virtuous cycle of hiring, consumer spending and more hiring but, after such a deep recession, 170,000 jobs per month is simply not enough.
The economy must add 13 million private sector jobs over the next three years -- 360,000 each month -- to bring unemployment down to 6 percent. Core private sector jobs must increase at least 300,000 a month to accomplish that goal.
Growth at 3 percent will only keep unemployment steady because the working age population increases one percent a year and productivity advances about 2 percent. Growth in the range of 4 to 5 percent is needed to get unemployment down to 6 percent over the next several years.
Prior to the turmoil in the Middle East, economists were forecasting 3.5 percent growth for 2011 but the surge in oil prices and gasoline to $4 per gallon will shave up to 1 percentage point from that outlook. For the entire year, growth in the range of 2.5 percent would be right on the razor's edge of what is sustainable without the economy tumbling into recession from additional layoffs.
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Structural impediments to growth
The U.S. economy and the durability of American prosperity are too vulnerable because temporary tax cuts, stimulus spending and large federal deficits don't address structural problems holding back GDP growth and jobs creation -- the huge trade deficit, dysfunctional energy and tax policies and rising healthcare costs are the culprits.
At 3.3 percent of GDP, the $500 billion trade deficit is a tax on domestic demand that erases the benefits of tax cuts. Consequently, the U.S. economy is expanding at about 3 percent a year instead of the 5 percent pace that is possible after emerging from a deep recession and with such high unemployment.
Oil and trade with China account for nearly the entire U.S. trade deficit.
The Obama administration is banking on electric cars and alternative technologies, such as wind and solar, to replace imported oil but those won't pull down gasoline consumption enough to reduce enough the oil import bill for the balance of this decade. Failure to produce more domestic oil and gas, by sending dollars abroad for imports, is a jobs killer.
China maintains an undervalued currency by purchasing about $450 billion in foreign currencies each year -- this reduces domestic Chinese consumption and subsidizes Chinese exports by about 35 percent. Failure act to offset Chinese currency subsidies, for example by taxing dollar yuan conversions, is the single most significant flaw in Obama administration policy to create an adequate numbers of jobs.
More broadly, major trading partners in Europe and Asia rely on value added taxes to finance government and healthcare, whereas Americans pay higher corporate taxes and directly for healthcare.
Under World Trade Organization rules, VATs are rebateable on exports from Europe and Asia and are applied on imports from the United States into those markets, creating huge pricing disadvantages -- American products are essentially taxed twice. A neutral change in U.S. tax policy toward a VAT -- swapping a VAT for reductions in corporate and personal income taxes -- would help remove a major competitive disadvantage on U.S. exporting and import-competing industries.
Finally, the 2010 healthcare law is pushing up healthcare costs, rather than reducing those as promised, making insurance unaffordable for many small and medium-sized businesses. Although manufacturing has enjoyed a stronger recovery than the rest of the economy, it has been significantly focused on activities that use very little labor illustrating the burden that healthcare imposes on U.S. employers.
The recent Standard and Poor's warning that U.S. debt may lose its AAA rating was more than a statement about the political gridlock in budget negotiations. U.S. debt problems will ultimately require more robust growth in employment and tax revenues and require Congress and President Barack Obama to revamp energy, trade, tax and healthcare policy. Without those, the American economy cannot succeed.
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(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.)
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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.)
