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POLITICAL ECONOMY
Outside View: Unemployment rises
by Peter Morici
College Park, Md. (UPI) Aug 3, 2012


disclaimer: image is for illustration purposes only

The U.S. economy added 163,000 jobs in July. Although an improvement over the first quarter, the ranks of the unemployed swelled another 45,000.

The unemployment rate rose to 8.3 percent even as 348,000 workers quit looking for work and were no longer counted in the official jobless tally.

In the weakest recovery since the Great Depression, nearly the entire reduction in unemployment since October 2009 has been accomplished through a significant drop in the percentage of adults participating in the labor force -- either working or looking for work.

Growth slowed to 1.5 percent in the second quarter as consumers pulled back and the trade deficit on oil and with China continued to drag on demand. The outlook for the second half of the year isn't much better. Car sales are stronger than a year ago but aren't likely to improve much further and housing prices have risen in recent months but on weak volumes.

The July jobs report indicates growth remains slow in the third quarter -- likely in the range of 2.5 percent.

Job gains were fairly evenly spread. Manufacturing added 24,000 jobs. Other big gainers included education, healthcare, professional services, leisure and hospitality, retail and wholesale trade and information and communications.

Construction lost 1,000 jobs and federal, state and local governments shed 9,000.

Gains in manufacturing production haven't instigated stronger improvements in employment largely because so much of the growth is focused in high-value activity. Assembly work, outside the auto patch, remains handicapped by the exchange rate situation with the Chinese yuan.

Recent moves by China to further weaken its currency and to close its markets to stimulate its own flagging demand indicate matters will get worse without a substantive response from Washington.

Also, concerns about health insurance costs, once ObamaCare is fully implemented, are discouraging employers. Mandated services raise costs and regardless of their merits, make adding employees more expensive at a time of great stress for most businesses.

The financial crisis in Europe and mounting problems in China's economy worry U.S. businesses about a second major recession and discourage new hiring. The U.S. economy continues to expand at a torturously slow pace and is quite vulnerable to shock waves from crises in Europe and Asia.

Factoring in those discouraged adults and others working part time for lack of full time opportunities, the unemployment rate is 15 percent.

Prospects for substantially lowering the headline unemployment rate are slim because so many folks who left the labor force would likely return if economic conditions improved.

The economy would have to add about 13.3 million jobs over the next three years -- about 370,000 each month -- to bring unemployment down to 6 percent. Growth in the range of 4-5 percent is necessary to accomplish that.

Growth is weak and jobs are in jeopardy because temporary tax cuts, stimulus spending, large federal deficits, expensive but ineffective business regulations and costly healthcare mandates don't address structural problems holding back dynamic growth and jobs creation -- the huge trade deficit and dysfunctional energy policies.

Oil and trade with China account for nearly the entire $600 billion trade deficit. Dollars sent abroad that don't return to purchase U.S. exports are lost purchasing power. Consequently, the U.S. economy is expanding at 2 percent a year instead of the 5 percent pace that is possible after emerging from a deep recession and with such high unemployment.

Without prompt efforts to produce more domestic oil, redress the trade imbalance with China, relax burdensome business regulations, and curb healthcare mandates and costs, the U.S. economy cannot grow and create enough jobs.

(Peter Morici is an economist and professor at the Smith School of Business, University of Maryland School, and a widely published columnist.)

(United Press International's "Outside View" commentaries are written by outside contributors who specialize in a variety of important issues. The views expressed do not necessarily reflect those of United Press International. In the interests of creating an open forum, original submissions are invited.)

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