Unemployment to Stay Above 10% in 2010
The economy continues to bleed jobs, even as GDP rebounds. Professor Peter Morici examines how employment may be a lagging indicator, but job losses should have abated by now even if a lot of new jobs are not being added.
Posted: January 8, 2010
Coming off a deep recession, GDP growth (as of this writing) should be much stronger than the 2.8 percent recorded in the third quarter. A poorly conceived and badly executed stimulus package, and the failure to correct structural problem that caused the Great Recession, are holding down growth.
Consequently, the economy is not creating jobs and certainly not creating good paying, full-time jobs with benefits. In October, the economy lost 110,000 jobs and unemployment was 10.2 percent. In November, unemployment edged down to 10 percent as roughly another 11,000 jobs were lost. Expect this rate to rise further into the New Year. Here?s why.
Unemployment would have already pierced 12 percent had not so many adults quit looking for work and left the labor force. Also, many adults have been forced to accept part-time work, but would prefer and need full-time employment. 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 19 percent.
From December 2007 through September 2009, the economy lost 7.3 million jobs. The recession has wiped out all of the jobs created in the private sector over the last decade. Unemployment claims continue to exceed 450,000 each week, indicating the bleeding will not end soon. Manufacturing shed 2.1 million jobs as the credit market meltdown and trade deficit wrecked havoc on residential construction and manufacturing. Layoffs spread to commercial construction, finance, retail sales, and other sectors.
The economy expanded 2.8 percent in the third quarter, but 0.8 percent of that was cash for clunkers, 0.5 percent was the tax credit for new home buyers, and a slower pace of inventory liquidation accounted for 0.9 percent. Sustainable growth was only about 1.0 percent. Economists expect that sustainable growth to improve to 2.8 to 3.0 percent in the fourth quarter, but that is not enough to pull down unemployment.
With productivity growing at least two percent a year and the working-aged population increasing one percent a year, GDP growth must exceed three percent to bring down unemployment. Hence, unemployment will exceed 10 percent in 2010 and stay there for the foreseeable future.
A poorly conceived, badly executed stimulus package and failure to correct structural problems are holding down growth. Unemployment will peak at 10.6 percent late in 2010 and stay there unless the economy heads down again.
Unless President Obama addresses the structural problems that caused the recession ? bad loans and securities on the balance sheets of regional banks and huge trade deficits on oil and with China ? the recovery will not be strong enough to bring down the unemployment rate. Regional banks labor under the weight of commercial real estate failures. Unable to effectively access Wall Street capital markets, regional banks are short on funds to loan to worthy small and medium sized businesses.
The TARP was intended to create a bad bank mechanism to sweep troubled assets off the books of the banks, much like the Resolution Trust during the Savings and Loan Crisis of the early 1990s. Instead, President Obama and the Federal Reserve have focused on boosting the profitability and bonus pools at the largest Wall Street banks and left to the wolves the regional banks and the businesses that rely on them for credit. Already, 124 of these banks have failed, while the Treasury and Federal Reserve prop up Bank of America and Citigroup.
During the economic expansion from 2001 to 2007, the trade deficit increased from about one percent of GDP to more than five percent. Nearly all of this was oil from the Middle East and consumer goods from China. The former was caused mostly by higher prices and the latter by China's persistent export subsidies and manipulation of currency markets to keep its yuan and products on overseas markets artificially cheap.
The trade deficit required Americans to spend a dollar and five cents for every dollar they earned to create enough demand for all the goods and services produced in the U.S. Americans spent more than they earned by borrowing on their homes and credit cards, while Middle East oil exporters and China supplied the funds through New York financial houses. When the bubble burst, the banks and economy collapsed.
Going forward, as the stimulus package pushes up government and consumer spending, the trade deficits on oil and with China will grow. This tax on demand for U.S. made goods and services will limit jobs creation. Consequently, as the economy expands, businesses will struggle to find enough capital, and the trade deficits will create a shortage of demand for U.S.-made goods and services. New layoffs will begin once the stimulus spending ends. Unemployment could easily rise to 15 percent, and depression-like conditions will become commonplace in many parts of the country.
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.
President Obama, like George Bush, emphasizes diplomacy to persuade China to stop subsidizing exports, undervaluing its currency through currency market manipulation and blocking imports. Treasury Secretary Geithner has downplayed the importance of China's biggest unfair trade practice ? the undervaluation of the yuan by some 40 percent. Diplomacy has failed for more than ten years, and now Secretary Geithner is assuming away the problem.
When Bill Clinton was in the White House, America enjoyed export growth and a trade-led economic expansion. Now that Obama is in the White House, Geithner says the Clinton prosperity was all a ruse, merely premised on a shaky financial system. Clinton got the banks working again, Obama subsidizes Wall Street bonuses. Clinton got American manufacturers exporting again, whereas Obama wants to shut them down with cap and trade.
Secretary Geithner has not explained how the Obama Administration can deliver jobs without taking on the trade deficit and, in particular, the high price of oil and Chinese mercantilism. Ordinary working Americans and the unemployed will get little of lasting value until the trade deficit, in particular imports of oil and from China, are addressed.
According to my forecast, unemployment will peak at 10.6 percent late in 2010, and then stay there unless the economy heads down again.
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 Bush took the helm, the unemployment rate would be about 13 percent. The difference is that discouraged workers that have quit looking for work are not counted by the 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 19 percent.
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Peter Morici, the former chief economist at the U.S. International Trade Commission, is now a professor at the Robert H. Smith School of Business, University of Maryland, College Park, MD 20742-1815, 703-549-4338, www.smith.umd.edu, email@example.com.
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