Annual Review & Forecast:
Economy Enters 2003 Mired in 'Twilight' of Uncertainty2002 Review 2003 Forecast
Summary
New Jersey and the nation have labored through two years of employment losses, brought on by a manufacturing-led recession that began in the spring of 2001. Although there have been some bright spots, with housing and auto sales being particularly strong, economic growth has been stunted by deep distress in the manufacturing, computer, commercial construction, travel, telecommunications, and investment banking industries. In fact, the nation has fallen into the worst hiring slump in 20 years, with about two million jobs lost since the start of the recession and few companies hiring new workers. The number of "discouraged workers," those who have given up looking for work, has swelled to about one million. They are not counted in the nation's 6 percent unemployment rate, which counts only those actively looking for employment.
The outlook going forward-already muddied by low business confidence, weak profits, and a three-year bear market in stocks-is overshadowed by the impending war with Iraq. Fear of a prolonged conflict with possibly severe global repercussions has all but paralyzed business spending. Yet, economists agree that business spending, which has declined sharply in each of the last two years, must show significant improvement before the economy can grow with confidence. This is especially true now that the consumer, who has single-handedly kept the economy afloat, is weary and debt-burdened following a two-year buying spree. The pent-up consumer demand that would normally drive a post-recession economy is now largely spent.
While economists say New Jersey is better positioned for economic growth than its Northeast neighbors, only two months in 2002 (October and November) produced notable employment gains for the Garden State. Not until the state creates a steady stream of new jobs will we be able to declare a final victory over this recession. Indeed, the choppy and uneven performance of the state and national economies over the last year has given economic forecasters an enormous headache. As Business Week aptly put it in a recent article, the economy appears to be "stuck in a twilight zone between full-fledged recovery and outright recession."
New Jersey Economy-2002 Review
Following two months of promising employment gains, New Jersey suffered a disappointing setback in December, underscoring the choppy and unpredictable nature of this economic recovery. It's two steps forward, one step back.
In December, New Jersey sustained a net loss of 3,100 private-sector jobs, eliminating about half of the modest job growth realized in the preceding two months. (In October and November, the state saw a net gain of 6,100 private-sector jobs.)
On this cheerless note, New Jersey ended its second consecutive year of employment declines. Private sector employment fell by a net 18,100 jobs in 2002, pulled down by eight months in which employment declined and only four in which it rose. This followed a loss of 13,500 jobs in 2001. (See chart below.)
Looking at the employment decline from another perspective, in the 18 months since the state's employment contraction got underway in July 2001, New Jersey has lost 32,500 private sector (i.e. non-government) jobs. The state ended 2002 with slightly more than 3.4 million private-sector jobs, a level not far above the recession low set last June. (See chart below.)
In last year's Review & Forecast, we noted: "..an anemic and uneven recovery could well make 2002 a year of lackluster growth." In most respects, this is how things turned out.
The up-and-down nature of this recovery is giving regional economists an unusually bad case of forecast schizophrenic. Even the esteemed dynamic duo of economic forecasting in New Jersey, Rutgers economists Jim Hughes and Joe Seneca, who together have been tracking the regional economy for more than two decades, are sounding optimistic one month and gloomy the next. The "Hint of Glad Tidings" report in their December Economic Heartbeat column was trumped by "A Chilly Season for Jobs" in January.
Joel Naroff, chief economist with Commerce Bank, said in an e-mail bulletin concerning the nation's weaker-than-expected 4th quarter GDP growth of 0.7%: "One quarter we're soaring. The next we're flat on our back."
Looking back over the last year, one industry that has remained mostly flat on its back, both nationally and in New Jersey, is manufacturing. In fact, manufacturers have borne the brunt of this recession. In the fall of 2000, goods producers led the nation into recession, and their recent performance, though improved, has done little to allay fears that the economy, far from gathering steam, is on the cusp of a double-dip.
In New Jersey, all but a fraction of the 32,500 private-sector jobs shed over the last 18 months have been in manufacturing. To be precise, the state's goods producers lost 32,400 jobs in this period or just over 7% of their pre-recession employment base. Every kind of manufacturing industry, from pharmaceuticals and machinery to publishing and telecommunications, has seen declines.
As of December, Garden State manufacturers employed 419,100 people, down from 451,500 in June 2001 at the start of the recession. This employment hemorrhage extends a long-term decline that has cut state manufacturing payrolls in half since 1979, when more than 800,000 people drew factory paychecks. (See chart 3 below)
As in past recessions, manufacturing employment losses accelerated as the economy turned down. Between 1993 and 2000, manufacturing employment declined by an average of 7,500 jobs annually. Over the past two years, the loss rate quickened to 22,500 jobs per year.
New Jersey's current poster child for the manufacturing downturn is Edison, which over the past year has learned it is losing two major employers, the Electrolux home-air-conditioner plant with 1,350 workers and the Ford auto assembly plant with 1,665.
The construction trades and service industries, the other two major sectors of the state's private-sector economy, have fared better than their goods-producing cousins have, but even in these sectors employment has remained flat.
The state's construction companies ended 2002 with 162,900 people on their payrolls, exactly where they started the year. The state's service-related industries ended the year with employment of 2,816,000 for a 12-month gain of just 900 jobs.
For a more detailed breakdown of winners and losers in 2002 by industry sector, see the chart below. As shown on the chart, one of the few clear winners last year was the health services industry, which added 5,700 jobs for a gain of 1.6%.
While New Jersey's recession has been painful, it has nonetheless been shallow. The state's loss of 32,500 jobs is miniscule compared to the nearly 300,000 jobs lost in the state's 1989-92 recession.
And the state's December unemployment rate of 5.5%, down from the recession high of 5.6% set the month before, is far below the peak of 9% seen at the end of the last recession. Our jobless rate also has been lower than the national rate for the last three years.
New Jersey Economy-2003 Forecast
The following forecasts have been provided by the Rutgers Economic Advisory Service, the NJ Council of Economic Advisors, Economy.com, and the Federal Reserve Bank of Philadelphia.
Rutgers Economic Advisory Service (R/ECON)
Looking ahead, the New Jersey economy is expected to settle into a slow-growth pattern that will create only half as many new jobs as the prosperous 1990s.In its mid-December forecast, the Rutgers Economic Advisory Service (R/ECON) said it expects employment in New Jersey, starting this year, to expand by an average of approximately 40,000 new jobs a year through 2007, an annual growth rate of about 1 percent.
This is far below the average of more than 90,000 new jobs a year created in the late 1990s, and slightly below the postwar average of about 45,000 new jobs a year.
In presenting her forecast, R/ECON Director Nancy Mantell said she believes New Jersey's economic recovery began in October 2002. "We are in a recovery," she stated. "I am confident this process will continue over the next year and the next few years."
"During the forecast period (through 2007), the state will add about 40,600 jobs annually," Mantell said. ""That's very modest growth and about 10 percent lower than the average annual growth during the post-World War II period."
Although the monthly unemployment rate may creep slightly higher next year, rising above its November peak of 5.6 percent, it should remain below the national rate and average about 5.5 percent for the year, Mantell said.
In her 2003 forecast for New Jersey, Mantell also projected:
- a 4.1% rise in real gross state product, following a 1.1% gain in 2002
- a 4.3% rise in real personal income, following a 4% gain in 2002
- consumer price inflation of 2.3%, versus 2.4% in 2002
NJ Council of Economic Advisors
The NJ Council of Economic Advisors, an independent group of advisors to the Governor, believes the performance of the state economy in 2003 and 2004 will run essentially parallel to that of the nation. The Council forecasts a moderate expansion of both employment and economic output, with an average of 45,000 new jobs being created over each of the next two years.
Looking at current labor market trends, the Council said it sees "clear evidence of the early stages of a recovery," particularly in the state's initial claims for unemployment, which have stabilized well below their May peak.
More than most states, New Jersey's fortunes over the next two years will be tied to the federal government's fiscal and tax policies, as well as its spending priorities. Because of New Jersey's above average share of high-income individuals, it stands to benefit more than most states from the President's proposed income tax cuts and dividend exemption. In addition, continued low interest rates and the dividend exemption, to the extent that they encourage investment in stocks, would help bring an end to the three-year bear market. This would benefit the state's large financial services industry and its high-income population. Higher spending on homeland security and defense is also likely to be a boon to the state's technology industries and defense contractors.
Even if the President succeeds in pushing his economic stimulus plan through Congress, the benefits to New Jersey will be offset to some extent by the state's deep fiscal problems, brought on by the sharp drop in tax revenues over the last two years. Governor McGreevey announced in February that he would cut state spending by $4.3 billion in Fiscal 2004 and lay off about 1,000 state employees to balance the budget, for which he has forecast a combined current and next-fiscal-year deficit of $6 billion. A resumption of growth in state government spending is not expected to take place until mid-2004 at the earliest.
In a particularly nasty side-effect, New Jersey's recession has brought about the first loss of employment in ten years in six "growth clusters" has identified by the Council as key drivers of the state economy. The six clusters are casinos/entertainment, pharmaceuticals/biotech, finance, research and technical services, logistics, and information technology. These clusters accounted for 40 percent of the state's job growth in the 1990s, but collectively lost 21,600 jobs in 2002. The outlook for these clusters is mixed, but in order for all six to resume their former steady growth patterns, consumer spending must pick up and, more importantly, business spending on capital improvements must rebound from its two-year slump.
Fortunately, home-building is expected to remain at current levels of about 28,000 new homes a year, fueled by the lowest mortgage rates in 37 years and high demand. Over the last five years, the average value of a residential building permit has risen by 40 percent! The median value of an existing home in New Jersey, at $261,000, exceeds the national average by $99,000.
The value of commercial construction contracts is expected to decline for a second consecutive year in 2003, dragged down by an office market hit hard by corporate layoffs and technology-company failures. The vacancy rate in the heavily built northern region has climbed to 15 percent. A recovery in this sector is hinges on strong employment growth in the service industries.
Exporting was the weakest sector of the state economy in 2002. The value of shipments fell for a second consecutive year to an estimated $22.4 billion, down from a record high of $28.8 billion in 2000. The decline in business spending, both in the United States and abroad, was a significant drag on the sector, as was the high value of the dollar. Technology exports, including computers and electronics, fell 57 percent in 2002.
Economy.com
Economy.com, a national forecasting service based in West Chester, Pa., is less sanguine in its near-term outlook for New Jersey.In his January report, economist Augustine Faucher said: "It is too soon to tell if New Jersey is coming out of recession, although employment is moving up very slowly in recent months."
However, he does expect the state to end 2003 with modest gains in employment and economic output. He notes that state government, facing a second year of multibillion dollar deficits and now a spate of state-employee layoffs, will not contribute to the state's employment growth until sometime in 2004.
Faucher also raises concerns about Governor McGreevey's proposed "war on sprawl," noting that it would discourage development in the areas of the state that are currently seeing the strongest growth, namely the northwest, central and southern portions of the state.
In a related report, Economy.com assesses the condition of the Northeast economy as "arguably the weakest economy in the nation," stating that the four states making up its core (Massachusetts, Connecticut, New York and New Jersey) remain in recession.
"The industries that drive growth in the region, including securities, insurance, telecommunications, computer software and electronics, all remain in decline," the report states, also noting that help wanted advertising in the Northeast has fallen below the low points reached in the 1990-91 recession.
The report concludes: "The Northeast's recovery will be slow, with employment not returning to its pre-recession peak until mid-2004."
Federal Reserve Bank of Philadelphia/South Jersey
Economic activity in Southern New Jersey rose modestly in December, continuing a modest upward trend seen through most of 2002.So says Ted Crone, economist with the Federal Reserve Bank of Philadelphia, in his most recent report on economic activity in the Philadelphia region.
"New Jersey's leading index remains strong enough that we can confidently expect growth to continue through the first half of 2003."
Crone said this is in marked contrast to economic activity indexes in Delaware and eastern Pennsylvania, both of which saw significant declines in December, putting both in negative territory and extending weakness seen in October and November.
The Philadelphia Fed's economic activity index is a composite indicator based on a number of factors including employment, unemployment, average hours worked in manufacturing, and real wage and salary disbursements.
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