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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.