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Economy adds 203,000 jobs, Fed pull-back on bond purchases grows likely

By Peter Morici
web posted December 9, 2013

The Labor Department reported the economy added 203,000 jobs in November, in line with the progress of recent months. Overall, the economy should be stronger in 2014, permitting the Fed to ease back on monthly bond purchases and let longer term interest rates rise modestly.

These purchases of government securities lowered mortgage rates and made home buying easier. These have helped push up housing values—and stock prices too. These have had their desired effect, and now new ways to stimulate the economy must be found.

The unemployment rate fell to 7.0 percent mostly because furloughed government workers returned to their jobs.

With third quarter GDP growth at 3.6 percent, businesses should be adding more jobs but much of that growth was from additions to business inventories as consumers remain tightfisted and goods stay on the shelves. Overall consumer demand contributed about 1 percentage point to growth, whereas inventories accounted for 1.7 percent.

Major apparel retailers report huge stocks of unsold goods entering the final weeks of holiday shopping. More broadly, Black Friday weekend disappointed their expectations for stronger sales than last year. These indicate much slower fourth quarter growth, as businesses slow purchases and retailers trim headcount more than usual in January.

Auto sales and rising home values remain a bright spot. With the uncertainty of new U.S. military activity in the Middle East and another government shutdown receding, consumers' confidence should strengthen through December and into the New Year.

Overall growth will be between 1 and 2 percent in the fourth quarter and then strengthen to 2.5 to 3 percent in 2014. However, hiring will likely continue at its present pace or improve only moderately. Good paying full-time jobs will continue to be scarce.

Overall, jobs creation is well short of the 365,000 needed each month to reduce unemployment to 6 percent over a period of two or three years, but that would require GDP growth in the range of 4 to 5 percent. Over the last four years, the pace has been a paltry 2.3 percent.

Obamacare health insurance mandates are increasing benefits costs for full-time employees. Along with anticipated penalties for not covering all employees working more than 30 hours per week in 2015, these will cause employers to either reconfigure toward more part-time workers or to only cautiously add workers.

Strident anti-business campaigns targeting McDonalds, Wal-Mart and other employers of lower-skilled workers add to pressures to substitute machines for workers or move to a more part-time economy in hospitality, retailing and other activities where wages are already subpar and job security nonexistent. All with lax immigration enforcement, these exacerbate income inequality.

The situation remains particularly tough for recent college graduates and older Americans, and many working age adults have quit looking for work. Adding part-timers who want full-time employment and discouraged adults, the unemployment rate becomes 13.2  percent.

Stronger growth is indeed possible. Four years into the Reagan recovery, following a recession that pushed up unemployment to higher levels than President Obama faced, the economy was growing at a 4.9 percent pace and creating jobs at a breakneck pace.

Still in this environment, Federal Reserve low interest rate policies and quantitative easing (monthly purchases of $85 billion of Treasury and government-agency securities) have done about as much good as can be expected. With a bit stronger growth beginning in 2014, look for the Fed to begin easing back on bond purchases.

The trade deficits on oil and manufactures with China subtract substantially from demand for U.S. goods, services and workers. Even with the recent surge in domestic production, petroleum imports exceed exports by more than 6 million barrels a day, and will require lifting bans on offshore drilling to eliminate. Currency manipulation and other forms of protectionism remain problems with China, Japan and Germany—America's principal competitors.

Addressing those problems could add nearly more than 4 million jobs directly and 7 million jobs with the usual secondary effects, all but eliminating unemployment and substantially reducing inequality. ESR

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





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