Friday, forecasters expect the U.S. Labor Department to report the economy added 204,000 jobs in February, down from 243,000 in January. My estimate is 180,000.
Despite anecdotal reports of new hiring and consumer optimism, weaker jobs gains are likely for the next few months, because real consumer spending, the largest component of economic growth, was flat November, December and January. Auto sales are doing well but higher gasoline prices are crowding out most discretionary purchases.
Unemployment is expected to remain at 8.3% in February, as jobs creation barely outpaces population growth. Over the past three years, the percentage of adults participating in the labor force–those employed, self employed, or unemployed but looking for work–declined significantly. If the adult participation rate was the same today as when Barak Obama became president, unemployment would be 11%.
Adding adults on the sidelines, those who say they would reenter the labor market if conditions improved and part-time workers who would prefer full-time positions, the unemployment rate becomes 15.2%. Factoring in college graduates in low skill positions, like counterwork at Starbucks, and unemployment is closer to 20%.
Fourth quarter economic growth as measured by gross domestic product was 3.0%, but for all 2011 it averaged only 1.7%.
Stronger real consumer spending in September and October, plus a surge in inventory investment and multifamily home construction, pushed up fourth quarter growth. However, the increase in household spending outpaced disposable income, debt piled up, and consumer activity stalled the next three months. In addition, higher gasoline prices are absorbing too much of the modest advances in nominal household income.
Sluggish consumer spending indicates businesses will have trouble unloading unsold goods and slow inventory investments, and together those will lower first quarter growth. A bit stronger nonresidential construction and auto sales will help, but overall GDP will grow at or below 2% in the first quarter–hardly enough to inspire businesses to add many more workers.
For the second quarter, things look brighter. Consumers will have assimilated higher gasoline prices and consolidated their credit positions by April, and further growth in household income should result in stronger real consumer outlays beyond the auto sector.
The economy must grow 3%–long term–to keep unemployment steady, because advances in technology permit labor productivity to increase 2% each year and population growth pushes up the labor force about 1%.
If conditions are mediocre and businesses cautious, productivity can slip–equipment and computers are kept beyond their economically useful lives. Then unemployment can be kept steady with 2.5% growth or even 2% but that poses risks.
The economy growing 2% or even 2.5% is like an airplane flying at low altitude. The plane can keep going, but the slightest unexpected obstacle and the plane ditches. Such difficulties may soon emerge in Europe or China.
The economy must add 13.2 million jobs over the next three years–367,000 each month–to bring unemployment down to 6%. GDP would have to increase at a 4% to 5% pace–that is possible after a long deep recession but for chronically weak demand for U.S. made goods and services.
Oil and trade with China account for nearly the entire $550 billion trade deficit, and dollars sent abroad to purchase oil and Chinese goods that do not return to purchase U.S. exports are lost purchasing power. Consequently, the U.S. economy is growing at 2% instead of the 4% to 5% pace that is possible after a long and deep recession.
Without prompt efforts to produce more domestic oil and redress the trade imbalance with China and the rest of Asia, the U.S. economy cannot grow and create enough jobs.
The author can be reached at firstname.lastname@example.org and followed on Twitter at @pmorici1.