Workers line up to hear President Barack Obama deliver a speech on jobs and the economyThe U.S. economy has hit some unexpected turbulence on the flight back to the land of full employment. May saw fewer than 50,000 jobs created in the private sector after the previous months saw more than 200,000 new private sector jobs.

While fiscal stimulus and related monetary policies have helped put a floor under the recession, it's clear that the U.S. will have to continue to innovate and discover a new engine of growth to get the "great American job-creation machine" humming again.

Three decades ago, investment in the auto and manufacturing sectors, aided by a substantial income tax cut and increased defense spending, ended the 1982-83 recession and propelled an impressive economic expansion. More than 18 million jobs were created, and the unemployment rate fell from 10.8% in 1982 -- a post-World War II high -- to 5.3% by the end of 1989.

In the following decade, the technological revolution ushered in by the Internet's explosive growth and by advances in personal computers, among other innovations, triggered the U.S.'s longest peacetime expansion in the modern era. More than 22 million jobs were created, and the unemployment rate fell below 4%.

Restricted Ability to Cut Taxes

With this as a blueprint, it's clear that the tax code and innovation play important roles in a robust economic expansion with adequate job growth.

However, concerning the tax code tool, recent public policies have restricted Congress's current options. A 2001 income tax cut and subsequent large spending for the Iraq/Afghanistan wars and for other programs resulted in the U.S. running a large budget deficit even before the financial crisis and recession hit. Programs to stabilize the banking system and stimulate the economy would later increase the annual deficit to more than $1.4 trillion. Given this gap, further income tax cuts by Congress to stimulate demand aren't likely, although additional tax credits to stimulate hiring are possible.

With additional tax cuts largely out of the picture, that puts the onus on innovation. After each period of job loss, the U.S. economic system has shown a remarkable ability to innovate, adapt, reorganize and retool. From when mechanization first displaced craftsmen who made things by hand at the outset of the Industrial Age, to when Japan's electronics industry displaced U.S. TV and radio manufacturers in the 1960s and 1970s, the U.S. economy has innovated and restructured. Americans found other, value-added things to do.

Innovation will, again, likely play a large role if the U.S. is to overcome current massive job losses triggered by the rise of China, India and other lower-cost emerging economies.

Cash-Rich Companies and Strength in Manufacturing

Further, there are some hopeful signs for the current decade. First, most large U.S. corporations are lean, cash-rich and poised for growth. Many are also leaders in their fields. So, they'll be ready to deploy capital and knowhow when demand increases. Each will aid job creation.

Second, U.S. manufacturing -- written off by some economists as a decaying, Rust Belt sector -- is leading the (albeit still light) U.S. job recovery, adding 126,000 jobs in the past five months.

Battle-ready U.S. corporations and a revitalized manufacturing sector represent job-growth tailwinds. Add higher-than-expected exports on a weak dollar,and the slow rise of emerging-market consumers, and one can make a credible, cautiously optimistic job-growth forecast. Better-than-expected performances by the U.S. housing and auto sectors in the years ahead would sweeten such a scenario.

Can Innovation Fill the Gap?


The problem is, the task facing the current expansion is the most formidable since the Great Depression of the 1930s. The recession that began in December 2007 has resulted in about 8 million layoffs. Further, 7 million Americans were already looking for work before the recession hit. Throw in the underemployed -- part-time employees seeking full-time work and discouraged workers -- and the result is an enormous job hole.

Innovation could lead to average monthly job growth of 150,000 to 200,000 positions, but given the size of the jobs deficit, the pace will need to be stronger than that to substantially reduce the high U.S. unemployment rate, currently 9.7%.

Moreover, the number of jobs needed is another reason U.S. stock market bears growl after just one subpar job month, such as May's. The bears point to such data points as a sign the U.S. economy can't create enough employment to sustain the expansion.

Clearly, in addition to innovation, what's needed now is some engine of growth, some catalyst that can generate hundreds of thousands of jobs. It hasn't appeared yet, but investors should keep in mind that the recovery is young. Like the baseball season, the U.S. expansion is in June, and as any baseball fan will tell you, pennants aren't won in June.

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