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There's a reason the economy isn't generating jobs

The economy added 96,000 jobs in August, down from 141,000 in July and not nearly enough to keep pace with population growth.

The unemployment rate fell to 8.1 percent only because 581,000 workers quit looking for work and are no longer counted in the tally.

In the weakest recovery since the Great Depression, the entire reduction in unemployment from its 10 percent peak in October 2009 has been accomplished through a significant drop in the percentage of adults participating in the labor force — either working or looking for work.

The most effective jobs program appears to be to convince working-aged adults they don't need a job.

Growth slowed to 1.7 percent in the second quarter, as consumers pulled back and the trade deficit on oil and with China continued to drag on demand. The outlook for the second half of the year is not much better. Car sales are stronger but are not likely to improve much further, and housing prices have risen but on weak volumes.

The August jobs report indicates growth remains slow in the third quarter — likely in the range of 2 percent or less.

Job gains were unevenly spread. Manufacturing and temporary help services lost 15,000 and 4,900 jobs, respectively, raising concerns that a recession is imminent. This will likely spur the Federal Reserve to take additional measures to lower interest rates, but with interest rates at record lows, such action will have limited positive effects.

Gainers included education, health care, professional services, leisure and hospitality, retail and wholesale trade, transportation and warehousing, financial services, and information and communications.

Construction added only 1,000 jobs, and federal, state and local governments shed 7,000 jobs.

Gains in manufacturing production have not instigated additional improvements in employment, largely because so much of the growth is focused in high-value activity. Assembly work, outside the auto sector, remains handicapped by the exchange rate situation with the Chinese yuan. Matters may get worse without a substantive response from Washington.

Also, concerns about health insurance costs, once Obamacare is fully implemented, are discouraging employers. Mandated services raise costs, and regardless of their merits, they make adding employees more costly at a time of great stress for most businesses.

The financial crisis in Europe and mounting problems in China's economy worry U.S. businesses and discourage hiring. The U.S. economy is quite vulnerable to shock waves from crises in Europe and Asia.

Factoring in those discouraged adults and others working part time for lack of full-time opportunities, the jobless rate is 14.7 percent.

Prospects for substantially lowering the headline unemployment rate are slim because so many folks who left the labor force would likely return if economic conditions improved.

The economy would have to add 13.6 million jobs over the next three years — about 377,000 each month — to bring unemployment down to 6 percent. Growth in the range of 4 to 5 percent is necessary to accomplish that.

It is simply not true, as President Barack Obama claimed in Charlotte, that the economy faces changes more daunting than any time since the Great Depression. Ronald Reagan inherited a similarly troubled economy, with unemployment peaking at 10.8 percent in November 1982. During his recovery, GDP growth was averaging a brisk 6.3 percent, in contrast to Obama's 2.2 percent.

Concerns about $500 billion in mandatory spending cuts and tax increases if the Congress and president don't act by January 1 have raised concerns about another recession in 2013 and are dampening business investment a bit and lowering growth below 2 percent in the second half of this year. More fundamentally, however, growth is chronically weak and jobs are in jeopardy because temporary tax cuts, stimulus spending, large federal deficits, expensive but ineffective business regulations, and costly health care mandates do not address structural problems holding back dynamic growth and jobs creation — the huge trade deficit and dysfunctional energy policies.

Oil and trade with China account for nearly the entire $600 billion trade deficit. Prompt efforts to produce more domestic oil, redress the trade imbalance, relax burdensome business regulations, and curb health-care mandates and costs would create 5 million to 10 million jobs, and lower unemployment to about 5 percent.

Peter Morici, an economist and professor at the University of Maryland's Robert H. Smith School of Business, is a widely published columnist. His email is pmorici@rhsmith.umd.edu. Twitter: @pmorici1.

Copyright © 2015, CT Now
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