Gas Prices, Labor Unrest Will Cloud Jobs Outlook

On Friday, economists optimistically expect the Labor Department will report the economy added 180,000 jobs in February. This may look like a breakthrough number, but caution should be the byword.

Monthly data are erratic and February gains should be read in the context of the paltry 36,000 jobs added in January. Going forward, budget cuts and union demands will trim government payrolls, and the private sector is creating very few permanent, non-government subsidized jobs.

After health care and social services, which are mostly government funded, and temporary services are backed out, the private sector added only 49,000 jobs January — not much more than the 42,000 per month since employment began climbing again in January 2010.

Simply, demand for what workers make is not growing fast enough. Fourth quarter GDP growth was a paltry 2.8%. Growth above 3% is needed to significantly dent unemployment, because the working age population expands about 1% a year, and productivity increases about 2%.

Additional tax cuts, effective in January, are giving consumer and business spending some lift but being temporary, the effect is limited. The recent spike in gasoline prices, caused by rebellions in Libya, Egypt and elsewhere, is siphoning off consumer dollars and dampening business interest in adding employees. Stagnating new home sales and related woes in construction of strip malls, roads and schools plus falling prices for existing homes further burden the recovery.

Prior to the turmoil in the Middle East, economists were forecasting 3.5% growth for 2011, but the surge in oil prices will likely shave half a point — perhaps more — from this less-than-rosy outlook.

Tax cuts do not address structural problems holding back jobs creation — principal among those are dysfunctional state legislatures and militant public sector unions, the huge trade deficit, and rising health-care costs.

State budgets are in crisis, burdened by ballooning Medicaid spending mandated by Washington and unsustainable union contracts — unrealistic pension and health-insurance benefits. Union militancy and absconded Democratic lawmakers shutting down legislatures will result in more layoffs than had normally budgeting and legislative processes proceeded. Union militancy and legislative shutdowns can only cause bond markets to conclude America’s state governments are poised to re-enact Greece’s crisis.

Last week, Illinois sold bonds due in 2019 by paying a whopping 5.9% rate — adjusted for the state bonds tax free status that’s 40% above corporate junk rates. A replication of this offering by other states would drive interest costs to unmanageable levels and precipitate a wave of state and municipal defaults.

The international trade balance contributed positively to fourth quarter growth, with real exports increasing and imports falling slightly. Petroleum imports were lower, but U.S. production likely will decline again in the Gulf and elsewhere and imports will rebound in 2011 if the economy does not tank.

Federal energy policies unnecessarily impede safe domestic oil and natural gas production. Those tax growth by destroying energy sector jobs and pushing up gas prices.

In the fourth quarter, nonpetroleum import growth moderated, too, and exports surged, improving the real trade balance and boosting GDP growth. However, these trends will be tempered in 2011 by slower growth and sovereign debt problems in both Europe and Japan, and political conditions across northern Africa and the Middle East. Coupled with an overvalued dollar against the Chinese yuan and other Asian currencies, these factors will drive the trade deficit higher and create a substantial barrier to jobs creation through 2012.

At 3.3% 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 less than 3% a year instead of the 5% pace that is possible after emerging from a deep recession and with such high unemployment.

Growth in the range of 3% is not enough to dent unemployment, unless hundreds of thousands of adults quit looking for work as they did in January. By the end of 2013, about 13 million private sector jobs must be added to bring unemployment down to 6%, and current policies are not creating conditions for businesses to hire 360,000 workers each month.

Without fixing state deficits and labor relations, energy policies and trade with China, high unemployment will be a permanent feature on the U.S. economy. Neither the Obama administration nor Republican leadership in the Congress appears inclined to do what needs to be done.

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.