Friday, forecasters expect the Labor Department will report the economy added 161,000 jobs in June. This is in line with the pace of recent months but hardly enough to lower unemployment down to acceptable levels.
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In the first quarter, GDP was up only 1.8%, owing to moderate growth in consumer spending and an inventory bounce. Despite greater optimism as expressed by consumers and small businesses in sentiment surveys, real consumer spending was sluggish in second quarter, and growth in industrial production, manufacturing and inventory investment slowed. Consequently, economists expect second quarter growth to be below 2%, again, despite the recent euphoria generated by surging home sales and prices.
Home prices have been juiced by rock bottom mortgage rates that have since risen, and it is important to remember those asset transfers at higher prices only impact on GDP and employment to the extent those drive up consumer spending and new home construction. The former has not happened, and although homebuilding is up, housing construction is only 3% of GDP.
Bottom line: a more robust economy can drive housing but surging housing prices are no panacea for what ails the economy and jobs market.
Since turning the corner in mid 2009, GDP growth has averaged 2.1% and unemployment has fallen from 10% to 7.6%. In contrast, high oil prices and double digit interest rates pushed unemployment to 10.8% during Ronald Reagan’s first term; then GDP growth averaged 5% and unemployment fell to 7.2%.
The economy must add more than 360,000 jobs each month for three years to lower unemployment to 6%. That would require growth in the range of 4-5% and is not likely with current policies.
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Factors contributing to the slow pace of recovery include the huge trade deficits on oil and manufactured products from China and elsewhere in Asia—these slow demand for U.S. goods and services. Absent U.S. policies to effectively confront Asian governments about their purposefully undervalued currencies, and to develop more oil offshore and in Alaska, the trade deficit will continue to tax growth.
The recent surge in natural gas production, and accompanying lower prices, is substantially improving the competitiveness of energy-using industries like petrochemicals, fertilizers, plastics, and primary metals—as well as their consuming industries like industrial machinery and building materials. However, Department of Energy efforts to boost exports of liquefied gas will reduce the trade deficit and boost growth much less, and create many fewer jobs, than keeping the gas in the United States for use by energy-intensive industries.
Dodd-Frank regulations make mortgages, refinancing, and home improvement loans much more difficult to obtain. The recovery in housing construction, though welcomed, remains lackluster as compared to past recoveries. In turn, this slows expansion in building materials, major appliances, furniture and other durable goods.
The high cost and slow pace of regulatory reviews are a constant complaint among businesses and dampen investment spending—and Washington shows no signs of listening. Government needs to subject policies to protect the environment and other regulatory goals to the same efficacy standards the market applies to commercial technologies—regulatory assessments and enforcement are needed but those must be delivered cost effectively and quickly to add genuine value.
Many businesses with overseas opportunities remain tentative about adding capacity and hiring workers in the United States. Instead, they look to Asia where government policies are more accommodating and prospects for growth remain stronger.
Without better trade, energy and regulatory policies, that is simply not going to happen.
Peter Morici is an economist and professor at the Smith School of Business, University of Maryland School, and a widely published columnist.