Six Consecutive Months of Job Losses
Put New Jersey in Recession TerritorySix consecutive months of job losses have put New Jersey unofficially into its first economic recession in nearly a decade, but regional economists expect economic activity to pick up in the first quarter of next year.
"Right now, we're not expecting a huge recession," says Augustine Faucher, an economist with Economist.com in West Chester, Pa. "We expect negative growth in the 3rd and 4th quarter, with the economy picking up slowly in 2002."
Faucher, who follows New Jersey for his firm, said the performance of the Garden State economy should parallel that of the nation. Rutgers University economist Jim Hughes takes a similar view, saying New Jersey probably slipped into a recession in the third quarter, from which it will emerge early next year.
In the first nine months of this year, the state's private sector lost 30,700 jobs, according to the latest state Labor Department data. (See chart below) The biggest decline came in the manufacturing sector, where employment fell by 19,900 jobs or 4.3 percent. Another 10,400 jobs were lost in services, a decline of about half a percentage point. Construction employment has remained essentially stable, incurring a nine-month loss of only 200 jobs.
By contrast, in the first nine months of last year, the private sector added a healthy 51,300 jobs for a gain of 1.5 percent.
Economists believe the September 11 terrorist attack has further dampened economic activity in New Jersey and the nation, although this won't show up in the nation's employment data until mid-November, when the numbers for October are released.
Even before the destruction of the World Trade Center, the downturn in New Jersey had begun to look more like winter flu than a summer cold. Mounting job losses, cooling auto sales, and rising mortgage foreclosures all pointed to a significant deterioration of economic conditions. Nonetheless, the state's leading regional economists, at least until recently, had remained fairly sanguine in their expectation that New Jersey would skirt a recession. Now all bets are off.
Although New Jersey is likely to benefit from the rebuilding of downtown Manhattan and the migration of businesses across the river, it will also share in pain of the economic aftershocks. Following are two economic snapshots of the New Jersey economy, one before the attack, the other after.
Before the Attack
On the morning of Tuesday, September 11, Rutgers University economists Jim Hughes and Joe Seneca had already begun to present their mid-year economic outlook for New Jersey when news of the attack filtered into their State House news conference.
Even before the attack, they noted, New Jersey in the second quarter had "joined the national economic slowdown." They pointed to falling employment, slowing income growth, rising initial claims for unemployment insurance, and weaker consumer spending.
An especially telling indicator of consumer confidence, auto sales (as measured by new-car registrations), fell by 10 percent in the first half. If sustained through the end of the year, it would be the first decline in auto sales since 1995 and the largest drop since the 1991 recession, Hughes and Seneca said in their report.
In the employment arena, a loss of jobs in the state's manufacturing sector has been compounded by falling or stagnant employment in other industries. Even the state's normally robust service sector, the workhorse of five years of vibrant employment expansion, had run out of steam by the end of the first half.
New Jersey's September employment data, released in mid October, confirmed what had been feared-namely that New Jersey had slipped into a recession even before September 11. The data shows employment falling in New Jersey for six consecutive months (April-September). In August, 8,800 jobs were lost, followed by another 6,400 jobs in September.
(A recession is defined as two consecutive quarters of declining economic output, which in New Jersey is measured by the Gross State Product (GSP). Because the second-half GSP for New Jersey won't be known until next year, employment data is used as a proxy for GSP to measure economic activity. Six consecutive months of falling employment puts New Jersey in unofficial recession territory.)
Although New Jersey's unemployment rate remains at an historically low level-4.5 percent in September-it should be remembered that unemployment is a lagging indicator that typically rises as a recession lengthens.
After the Attack
Anecdotal and statistical evidence collected in the weeks following the attack suggest that the initial shock shifted an already slowing economy into an even lower gear.
Hardest hit by the attack was the airline industry. Within ten days, seven major airlines had announced 120,000 layoffs. Continental, which employs 13,000 people in Newark, said it would layoff 12,000 nationwide. Although Continental has not said how many employees it will lay off in Newark, as many as 2,000 positions could be retired, not all of them through layoffs, according to published reports.
The drop in business for airlines has been precipitous. Their passenger volume has fallen by half, putting them on extremely shaky financial ground and leading Congress to approve a $15 billion airline bailout package. But the fallout has also been severe for industries that depend heavily on air travel, including hotels and restaurants, tourist facilities, travel agencies, and taxi services.
The economic pullback following the attack also had a big and immediate impact on New Jersey's casino industry. Harrah's Atlantic City and Showboat Casino-Hotel said their business fell by 23 percent in the five days ending September 15. Although casino business is expected to pick up again, no one knows what the longer term impact will be.
On September 25, aircraft equipment manufacturer Honeywell International Inc., which employs 2,250 people in New Jersey, announced that it would eliminate another 3,800 jobs worldwide, bringing its total cuts for the year to nearly 16,000. While CEO Lawrence Bossidy told analysts in New York that most of the cuts would have been made anyway, he said the terrorist attacks exacerbated the situation.
Despite these negative aftershocks, in the long run New Jersey is actually expected to benefit from the destruction of the World Trade Center, although "for all the wrong reasons," says Rutgers economist Hughes.
Approximately 20 million square feet of office space was wiped out when the twin towers collapsed, more than 15 percent of downtown Manhattan's total supply and considerably more than the total office space in cities like St. Louis and San Diego.
Before the week was out, some of Wall Street's largest financial companies had taken sizeable chunks of space in Parsippany, Jersey City and Newark. In a single weekend, a reported 2.5 million square feet was snapped up in New Jersey's northeastern counties. Through the end of October, commercial real estate activity remained strong in New Jersey as New York City companies continued to search for space outside downtown Manhattan.
Hughes said the exodus from New York could add more than 20,000 permanent jobs to New Jersey's employment base, an economic boon that would carry with it many millions of additional dollars in tax revenues, consumer spending and demand for housing.
New Jersey construction firms also stand to benefit from the more than $20 billion that will be poured into the cleanup and reconstruction of downtown Manhattan. Billions of dollars in additional federal emergency funding will also seep into the New Jersey region.
New Jersey's sizeable defense industry has already seen a pickup in business as the Pentagon orders more supplies and new equipment to carry out the Administration's new war on terrorism. Among the companies likely to benefit are ITT Industries in Clifton, DRS Technologies Inc. in Parsippany, Smiths Industries Aerospace in Florham Park, Lockheed Martin in Moorestown, L-3 Communications in Teterboro, Curtiss-Wright in Lyndhurst, GEC-Marconi in Wayne and Kearfott Guidance and Navigation in Little Falls.
Conclusion
Whatever benefits New Jersey may reap from the events of September 11, the fate of our economy is, in the final analysis, tied to the fate of the national economy. Although economists see signs that a rebound will occur early next year, they also admit that the current set of circumstances is entirely unique and does not lend itself to tidy economic analysis. Terrorist attacks on the nation's ground transportation system, energy plants or water supplies, for example, could lead to widespread panic and economic paralysis.
Under even the most optimistic scenario, then, the seriousness of the current downturn should not be dismissed or taken lightly.
Just as New Jersey's fortunes are tied to the nation, so too are the nation's fortunes tied to the world markets. Evidence is now mounting that the economies of our major trading partners, such as the members of the European union, are slowing in response to the US recession. A protracted global recession, although not predicted as yet, would deal a severe blow to any hope of recovery here.
When Alan Greenspan and the Federal Reserve lowered short-term interest rates to 2.5% on October 2, their ninth cut this year, bringing the federal funds rate to its lowest level in 40 years, they signaled very deep concerns about the state of the US economy.
And if Mr. Greenspan thinks we're in a deep hole, it's quite likely we are.
For more information, contact Christopher Biddle at cbiddle@njbia.org.
Economists Agree We Are in Recession