criteria economist view

COLLEGE PARK, Md., June 3 (UPI) -- Economists expect a strong U.S. jobs report for May but the unemployment rate is expected to ease only slightly.

Friday, the U.S. Labor Department will release May employment data and forecasters expect something north of 500,000 new jobs. However, many are in the public sector reflecting stimulus spending. Manufacturing is expected to add a respectable 30,000 new positions.

Unemployment is expected to only fall to 9.8 percent from 9.9 percent in April because many sidelined adults, sensing improved conditions, started looking for work.

The big challenge is to keep gross domestic product growing at least 3 percent to pull down unemployment.

Much recent growth has been inventory adjustments and sustainable growth, reflected in real consumer and business investment demand, has been only about 2 percent. As stimulus spending tails off, new sources of demand will be needed.

If the economy keeps growing at 3 percent the balance of 2010, demand for new capacity -- improved rental housing, better located new homes and commercial construction for retail and factory improvements -- should accelerate in 2011. Auto sales, currently a bit more than 11 million a year, should move up to 12 million plus with noticeable multiplier effects in the Midwest and Upland South.

Fiscal problems in Greece, Spain and elsewhere in Europe and dallying by European leaders in addressing fiscal imbalances and problems at banks pose genuine threats to global recovery. Obama administration and Federal Reserve support of the International Monetary Fund contribution and dollar currency swaps were sound responses.

European leaders resisting genuine bank stress tests and transparency about bank capital requirements and blaming short-selling and Anglo-Saxon capitalism for problems created by their own hands, reinforce the growing judgment of financial markets that European leaders are incapable of accomplishing adequate systemic reforms to rehabilitate their economies. Europe seems forever mired in adolescent denial and alibis -- a malignant European character flaw.

On this side of the pond, greater realism is needed about U.S. budget challenges as the recovery continues or America will join Europe down the proverbial drain of financial self abuse. Near term, demand must be fired up to significantly dent unemployment.

The economy must add more than 13 million mostly private sector jobs to bring unemployment down to 6 percent by the end of 2013.

Businesses need customers and capital to invest in new facilities and jobs and private demand growing at less than 2 percent and troubles at regional banks remain huge problems.

The trade deficit -- in particular, huge imports of oil and the imbalance with China -- cuts a wide hole in demand for U.S. goods and services. Without addressing oil and China, creating enough new jobs is daunting.

Detroit has the technology to produce much more efficient vehicles now and a shift in national policy to rapidly build these would push out imported oil and create many new jobs.

China maintains an undervalued currency that makes its products artificially cheap and deceivingly competitive on U.S. store shelves and it practices virulent protectionism against U.S. exports.

China won't respond to diplomacy and reason. U.S. President Barack Obama and Treasury Secretary Timothy Geithner should quit the hand-wringing and implement comprehensive policies to counter Chinese abuse of free trade. That would begin with a tax on dollar-yuan conversions that would raise the price of Chinese imports to their true cost to the U.S. economy.

Regional banks, which serve small and medium-sized businesses, remain burdened by failing commercial real estate loans and mortgage-backed securities. The Troubled Asset Relief Program was intended to remove many of those loans from their books but has often been abused by policymakers to aid political constituents on Wall Street and Detroit.

A Savings and Loan Crisis-era Resolution Trust could relieve regional banks of troubled loans, earn a profit for the government, and give small and medium-sized businesses adequate bank credit again.

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(Peter Morici is a professor at the Smith School of Business, University of Maryland, and former chief economist at the U.S. International Trade Commission.)

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(United Press International's "Outside View" commentaries are written by outside contributors who specialize in a variety of important issues. The views expressed do not necessarily reflect those of United Press International. In the interests of creating an open forum, original submissions are invited.)



ECONX ISM Services Remain at April Levels

The ISM nonmanufacturing index remained unchanged at 55.4 for the third consecutive month in May. The consensus estimate called for the index to increase modestly to 55.6. This was the fifth consecutive month that the index remained in expansion mode. Even though the overall index was unchanged, the subcomponent indexes showed a very strong services sector. Every subcomponent index was above 50, which is the line of demarcation between expansion and contraction. This is the first time in well over a year that all the subcomponents were expanding. Business activity increased from 60.3 to 61.1. This came after new orders growth decelerated slightly, falling from 58.2 to 57.1. Normally for business activity to strengthen while orders weaken, businesses activity will depend on filling backlogs. However, in this case, backlogs entered an expansion phase as the index increased from 49.5 to 56.0. We believe that there was an influx of orders at the end of April that ended up being filled in May. Therefore, a large percentage of the May orders could not be filled until later. The large supply of backlogs should keep business activity in expansion mode for the near future. The labor sector is on its strongest footing since the recession began. For the first time since December 2007, nonmanufacturing firms revealed an expansion in hiring as the index increased from 49.5 to 50.4. Profit potential strengthened as price growth slowed as the index declined from 64.7 to 60.6.


ECONX Factory Orders Disappoint on Poor Nondurable Orders

Factory orders growth was a disappointment in April as orders increased 1.2%, 0.5 percentage points less than expected. The underperformance was centered on nondurable goods orders. After increasing 3.1% in March, they declined 0.1% in April. The consensus expected nondurable goods orders to increase 0.7%. The data would have been even worse if not for a surge in orders for Boeing aircraft. Aircraft orders increased 228.1%. Excluding transportation orders, total manufacturing demand declined 0.5%. The advance durable goods report did a very good job at estimating the final durable goods orders. Durable orders were only revised down 0.1 percentage points from 2.9% to 2.8%. The majority of the downward revision was due to machinery orders being revised down from -5.9% to -7.0%. In terms of second quarter GDP, business investment has started off on the wrong foot. Upward revisions in March resulted in weaker-than-expected April orders. Demand for nondefense capital goods excluding aircraft fell 2.6%, down 0.2 percentage points from the advance release. The lack of orders signals a possible decline in shipments in May. Negative shipments in May would have been fine for our GDP estimates if shipping growth occurred in April. However, revisions to the data revealed no growth in April shipments. As a result of the weak orders numbers, we have lowered our equipment and software investment expenditure estimate.