Contracting GDP Sours Jobs Outlook

NEW YORK (TheStreet) -- The Commerce Department reported GDP fell 0.1% in the fourth quarter. Weak conditions abroad and flagging U.S. competitiveness caused exports to contract by $27 billion and businesses anticipating a further slowdown slashed inventories by $40 billion.

Friday, forecasters expect the Labor Department to report the economy added 160,000 jobs in January; however, employment tends be a lagging indicator and flat or negative GDP growth will cause unemployment to rise sharply in the months ahead.

The tax and spending package implemented Jan. 1 reduces prospects for improved growth and jobs creation, as the U.S. economy and workers continue to suffer from insufficient demand.

Factors contributing to weak demand and slow jobs growth include the huge trade deficits with China and other Asian exporters of manufactures and on oil. Absent U.S. policies to confront Asian governments about their purposefully undervalued currencies, and to develop more oil in the eastern Gulf, off the Atlantic and Pacific Coasts, and in Alaska, the trade deficit and its drain on growth will worsen.

The recent surge in natural gas production, and accompanying lower prices, has the potential to substantially improve the international competitiveness of industries like petrochemicals, fertilizer, plastics and primary metals -- as well as consuming industries like industrial machinery and building materials. However, the Department of Energy is considering proposals to boost exports of liquefied gas -- a costly and environmentally risky process. That would reduce the trade deficit and boost growth less, and create many fewer jobs, than keeping the gas in the U.S. for use by energy-intensive industries.

In 2013, virtually every wage earner is paying higher payroll taxes, and the recent budget deal raises income taxes $40 to $50 billion annually, mostly from higher rates on families earning more than $450,000. Together, those further dampen consumer spending and aggregate demand.

On the supply side, increased business regulations, rising health care costs and mandates imposed by Obamacare, and higher tax rates on small businesses raise the cost of capital.

With the president's choices for key second-term cabinet and high-level administration posts falling into place, small businesses have much more certainty -- the assurance of more burdensome regulations, even higher health care costs and the prospects of further tax increases to cope with spending and deficit issues in Washington. All those will weigh on investment, growth and jobs creation.

Households are reporting pessimistic expectations about the job market. The Conference Board survey of consumer confidence was down significantly in January, in large measure because respondents reporting jobs hard to find rose to 38% and those anticipating their incomes to decline increased to 23%.

The economy must add more than 358,000 jobs each month for three years to lower unemployment to 6% and that is not likely with current policies. That would require growth in the range of 4% to 5%. Without better trade, energy and regulatory policies, and lower health care costs and taxes on small businesses, that is simply not going to happen.

Most analysts see the unemployment rate for January steady at 7.8%, but the wildcard remains the number of adults actually working or seeking jobs -- the measure of the labor force used to calculate the unemployment rate.

Labor force participation is lower today than when President Obama took office and the recovery began. Factoring in discouraged adults and others working part-time that would prefer full time work, the unemployment rate is 14.4%.

Though Congress has postponed sequestration, the posture taken by the president in negotiations with Houser Speaker John Boehner indicates the administration and Democratic lawmakers have little interest in substantially curbing spending on health care and other entitlements.

The likelihood of a downgrade in the U.S. credit rating by Moody's is significant and rising, and this weighs heavily on the investment plans of many U.S. multinational corporations. Those can invest and create jobs in Asia, where national policies better favor growth, instead of the U.S. where higher taxes, spending and deficits are out of control.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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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