Core Private Sector Jobs Key to Friday's Report

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( TheStreet) -- The Labor Department is expected to report 185,000 jobs were created in April. After gains of 194,000 and 216,000 in February and March, this could indicate the economy is accomplishing some moderate momentum.

However, first quarter GDP growth was a disappointing 1.8%, and many businesses can easily accommodate modest growth in demand by increasing productivity. Indeed, over the last month, first-time unemployment claims have risen to near recession levels indicating slower-growing business are laying off workers again. A disappointing jobs report would indicate the economy is slowing further and in danger of slipping into a second recession.

Earlier this year, economists were more optimistic about first-quarter growth, but the expansion was slowed by: higher gas prices and rising health insurance costs that diverted consumer dollars from jobs creating spending; uncertainty about federal budget negotiations, fears of a U.S. debt downgrade and still weak bank lending that discouraged private business investment; weak defense outlays and state spending cutbacks and tax increases; and rising oil import costs and U.S. drilling activity slowed by tighter regulations.

Most forecasters believe some of these forces are abating, second-quarter growth will come in above 3% and full-year growth will be at least 2.5%.

Friday, the key variable to watch is core private sector jobs growth -- private jobs less the heavily subsidized private health care and social services sectors, and temporary business services.

Core private sector jobs have the potential to set off a virtuous cycle of hiring, consumer spending and more hiring. In February and March, this barometer of private sector vitality gained 183,000 and 157,000 new positions. A similarly strong core private sector gain will be needed to add 185,000 to 215,000 new jobs, overall, each month.

Still, job gains in the range of 200,000 a month are not enough to push unemployment down to acceptable levels.

The economy must add 13 million private sector jobs over the next three years -- 360,000 each month -- to bring unemployment down to 6%. Core private sector jobs must increase at least 300,000 a month to accomplish that goal.

Since the recovery began in July 2009, it has expanded at a 2.8% annual rate. Growth just below 3% t is hardly enough to keep unemployment steady, because the working age population increases 1% a year, and productivity advances about 2%. Growth in the range of 4% to 5% is needed and possible to get unemployment down to 6% over the next several years.

After a deep recession, the economy can grow 5% annually. However, unnecessary dependence on foreign oil, the trade deficit with China, and health care and tax policies encourage outsourcing and are slowing growth and jobs creation.

At 3.3% of GDP, the $500 billion trade deficit taxes domestic demand and U.S. growth, and oil and China account for nearly the entire U.S. trade gap.

The administration is banking on electric cars and alternative technologies, such as wind and solar, to replace imported oil, but those won't significantly reduce the oil import bill in this decade. Failure to develop domestic oil and gas, by sending dollars abroad that do not return to purchase U.S. exports, is a jobs killer.

China maintains an undervalued currency by purchasing annually about $450 billion in U.S. dollar denominated securities and other currencies in foreign exchange markets. This reduces domestic Chinese consumption and subsidizes Chinese exports by at least 35%. Failure to act to offset Chinese currency subsidies, for example by taxing dollar yuan conversions, is the single most significant flaw in Administration policy to create an adequate numbers of jobs.

More broadly, major countries in Europe and Asia rely on value added taxes to finance government and health care, whereas Americans businesses pay higher corporate taxes and health insurance for employees. Under WTO rules, VATs are rebated on exports from Europe and Asia and applied to U.S imports in those markets, creating huge pricing disadvantages for American products. Changing U.S. tax policy -- swapping a VAT for equal reductions in corporate and personal income taxes -- would remove this disadvantage on U.S. exports and import-competing products.

The 2010 health care law is pushing up health care costs, rather than reducing those as promised, making insurance unaffordable for many small and medium sized businesses. This is encouraging business to move more jobs off shore.

Without fixing energy policies, addressing Chinese currency subsidies, modifying the tax structure, and truly reforming health care, high unemployment will be a permanent feature of the U.S. economy and real wages will decline.

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Professor Peter Morici, of the Robert H. Smith School of Business at the University of Maryland, is a recognized expert on economic policy and international economics. Prior to joining the university, he served as director of the Office of Economics at the U.S. International Trade Commission. He is the author of 18 books and monographs and has published widely in leading public policy and business journals, including the Harvard Business Review and Foreign Policy. Morici has lectured and offered executive programs at more than 100 institutions, including Columbia University, the Harvard Business School and Oxford University. His views are frequently featured on CNN, CBS, BBC, FOX, ABC, CNBC, NPR, NPB and national broadcast networks around the world.

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