Unemployment to stay above 10 percent in 2010

December 3, 2009

morici– Peter Morici is a Professor at the Smith School of Business, University of Maryland, and former Chief Economist at the United States International Trade Commission. The views –

The economy continues to bleed jobs, even as GDP rebounds. 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.

Coming off a deep recession, GDP growth should have been 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 problems 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.

Friday, the Labor Department will report employment data for November. In October, the economy lost 190,000 jobs, and the consensus forecast is for another 100,000 jobs lost in November.

Unemployment was 10.2 percent in October, and professional forecasters expect it to stay at that level in November, though that rate is expected rise further into the New Year.

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 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.

Construction and manufacturing shed 1.6 and 2.1 million jobs, respectively, 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.

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.

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 United States. 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 and 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 Democrat Bill Clinton was in the White House, America enjoyed export growth and a trade-led economic expansion. Now that Democrat 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 manufactures exporting again, whereas Obama wants to shut them down with cap and trade.

Treasury Secretary Timothy 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.

The jobs summit will deliver more band aids. 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.

5 comments

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Following a Keynesian approach the US administration during 2009 has focused on restoring consumer spending. They tried to achieve this with a massive injection of liquidity in the banks financial system , with a FED financing of mortgages through the quantitative easing policy , a near-zero interest rates and with various consumption incentives such cash for clunkers and a massive investment in infrastructuresThis has lead to a budget deficit of nearly than 10 per cent of the GDP.In the future a deficit of this size will impede the US to preserve his AAA S&P debts rating. Losing his AAA rating will jeopardize the capability of the US to finance his budget through the sale of US Treasury debts.To avoid this happening the Obama administration can not only rely upon the devaluation of the dollar to promote greater exports.Eventually it will be forced to increase the taxation of the middle class. This will help to rein the budget but at the same time it will put a lid on the US growth for the foreseeable future.

Posted by Gastone Ciucci Neri | Report as abusive

WW I bankrupted the economies of the world. Unemployment, inflation, poor working conditions and starvation lead to protests and revolt in the streets of the United States and Europe. The terrible living conditions endured by the people of Europe led to the rise of Mussolini, Franco and Hitler. The Czar was deposed and his family subsequently murdered. Banks collapsed.Then as now leaders around the world were not concerned about the costs of war. I am sure some one has already coined the term “Oil Wars” to describe this age we live in. We do not have to repeat the same mistakes.

Posted by Anubis | Report as abusive

Your points about Mr. Clinton are well-taken. After the failure of Hilarycare and the success of the GOP in the 1994 mid-terms, Mr. Clinton understood the message from the voters and tacked away from the hard-left (where most of his advisors were) to the centre-right. The result in the late 90′s speaks for itself. I’m not an admirer of Bill Clinton but he deserves credit for the late-decade boom under his watch. Will Mr. Obama do the same? Frankly, unless he is willing to tell the ivory-tower academics and union bosses – all of whom have his attention these days – to shove off, I would doubt it. The voters may have to rebuke Mr. Obama next November.

Posted by Gotthardbahn | Report as abusive

10% is the U3 figure. Government cooks up publicly released unemployment numbers to make it seem like there is nothing to worry about. When we look at the U6 figures, they paint a much uglier picture….those numbers are more like 22% unemployment.

Don’t believe me, check for yourself.

Posted by sideefx | Report as abusive

Since hundreds of thousands of jobs are lost in the US as well as jobs that have gone oversees, I would hope that we would concentrate on creating less humans. Less people equals more jobs. The decrease in population in the US will benefit all of us. I’m one of those long term unemployed, and I’m feeling really frustrated. In addition to the advantage of more jobs, lowering population also has the plus side of being a lot more sustainable for the environment.

Posted by Edore | Report as abusive