Expect Only Modest Jobs Growth as Economy Weakens
The economy expanded at a 2.2% annual pace in the first quarter, down from 3.0% the prior period. However a good deal of recent growth was momentum in consumer spending, as households took on more long-term debt to finance autos and higher education, and business inventory investments, as many firms miscalculated sales and overstocked.
Consumers cannot continue to increase debt in the manner of the boom years of the 2000s, and inventory purchases will moderate. Auto purchases have likely peaked or reached a plateau. And don't look for universities to recruit any more reluctant students taking shelter from a tough jobs market.
Second-quarter economic growth is likely to be much less than 2%, and fewer than 200,000 jobs should be added each month. New jobs created will hardly be enough to replace all those lost during the Great Recession and provide opportunities for new graduates looking for work.
During the recent recovery, the most effective jobs program has been to convince adults they don't want or need a job. Some 80% of the reduction in the unemployment rate from 10% to 8.2% has been from adults quitting the labor force.
The percentage of adults participating in the labor force -- those employed, self-employed or unemployed but looking for work -- has declined significantly. If the adult participation rate was the same today as when Barak Obama became president, unemployment would be 10.7%.
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 14.5%. Factoring in college graduates in low skill positions, like counterwork at Starbucks, and unemployment is much higher still.
Longer term, the economy must grow 3% annually 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 growth can slip -- equipment and computers are kept beyond their economically useful lives. Then unemployment can be kept steady with 2% growth, but that poses risks.
The economy growing 2% 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.