The economy added 223,000 jobs in April—well below the 260,000
averaged during 2014—pitching cold water on forecasts of stronger
economic growth this spring and complicating Fed plans to raise
interest rates.
Unemployment was 5.4 percent, largely because so many prime working
age adults are still not employed or looking for work.
The Commerce Department initially estimated first quarter growth at
0.2 percent but subsequently reported a much larger than anticipated
March trade deficit. Consequently, first quarter growth will likely
be revised down to -0.2 percent, and economists are lowering growth
forecasts for the balance of 2015.
The oil and gas sector—a major driver of the economic recovery—has
cut investment and jobs, and the ripple effects for supporting
industries and communities have been pronounced. Consumers have been
so far reluctant to spend much of the boost in their buying power
from lower gasoline prices; hence the net effects from lower oil and
fuel prices have not proven the boom to the economy that
policymakers anticipated.
The strong dollar is a key factor behind the surging trade
deficit—it makes imports from China and South Korea cheaper and U.S.
exports competing with Japanese and German products more expensive.
Without relief from an excessively strong dollar—made possible by
Asian and European monetary policies targeting dollar exchange
rates—resurrecting U.S. growth and decent jobs creation are nearly
impossible.
The Federal Reserve would like to raise interest rates, because
prolonged periods of rock bottom rates impose distortions on the
deployment of capital in the economy. For example, savers and
investors are driven to risky junk bonds to find adequate returns,
and cheap loans empower traders and dealmakers on Wall Street whose
influences on economic growth are akin to the contribution of
processed sugar to the healthfulness of the American diet.
Also, inflation is picking up. Anecdotal reports of employers such
as Aetna, Hobby Lobby and GAP increasing wages are now confirmed by
the Labor Department’s closely watched Employment Cost Index. Core
inflation—consumer prices net of volatile energy and food
prices—have firmed in recent months and are approaching the Fed’s
target of 2 percent a year.
Raising interest rates could push up the dollar—further increasing
imports and handicapping U.S. exports.
Without any change in Fed interest rate policy, the economy is
likely to grow about 2.3 to 2.7 percent the balance of this year,
and that won’t be enough to raise jobs creation to 2014 levels.
The sixty four dollar question becomes will the Fed impose another
hit on U.S. businesses competing in global markets by nudging up
interest rates and the dollar against Asian and European currencies,
and be satisfied with an even more disappointing pace of jobs
creation.
One theory is that slower jobs creation is inevitable, because so
many adults who have left the labor force —especially the 7 million
idle men between ages 25 and 54—are permanently out. Receiving
subsidies for health care, food stamps and other government benefits
that phase out as family incomes rise, it simply takes a much higher
wage than many jobs now pay—or would pay with a higher minimum
wage—to coax many adults into working.
Without exchange rate reform—international disciplines embodied in
trade agreements that combat predatory monetary policies—and
entitlement reform, the Fed could push interest rates into negative
territory without instigating more growth and jobs creation. But
without higher rates, cheap credit makes it the exchequer to the
gamblers on Wall Street.
Ultimately, tough rules for currency manipulation in international
trade agreements and entitlement reform—two items President Obama
vehemently opposes—are necessary for the Fed to be effective.
Unfortunately, Yellen would rather publicly comment on the dangers
of income inequality and stay silent on the dollar than challenge
her patron in the Oval Office with the requirements of good economic
policy.
Peter Morici is an economist and business professor at the
University of Maryland, national columnist. He tweets @pmorici1