Expect Lackluster Job Creation, Smith Professor Says

SMITH BRAIN TRUST -- A second month of slow job growth appears to further delay a looming interest-rate hike prescribed by Fed Chairwoman Janet Yellen six weeks ago. Professor Peter Morici at the University of Maryland’s Robert H. Smith School of Business says such a hike risks pushing up the dollar and handicapping U.S. exports. Without a hike, prolonged slow growth means lackluster job creation below 2014 levels. 

The economy in April added 223,000 jobs -- fewer than forecast. “A futures-based measure shows December as the first time the Fed is likely to increase rates,” Bloomberg Business reports. Morici explains the Fed seeks the hike to offset prolonged periods of rock bottom rates that distort 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.”

But raising interest rates could further elevate the strong dollar, 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," Morici says. "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."

Furthermore, not raising interest rates means 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,” Morici says. “And cheap credit makes (the Fed) the exchequer to the gamblers on Wall Street.”

Unemployment is 5.4 percent but “largely 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,” Morici says.

“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,” Morici says. Read his full commentary at CNBC.

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