The September 11 terrorist attacks have knocked an already weakened economy onto its knees and into a recession, economists say, but a modest recovery should take hold 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 the nation's. Rutgers economist Jim Hughes takes a similar view, saying New Jersey probably slipped into a recession1 in the third quarter, from which it will emerge early next year.

Even before the attack, 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 September 11, 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.

In the first eight months of this year, the state's private sector lost 22,800 jobs, according to Labor Department data. (See Chart below). The biggest decline came in the manufacturing sector, where employment fell by 16,200 jobs or 3.5 percent. Another 6,900 jobs were lost in services, a decline of one quarter of a percentage point. Construction employment remained stable, eking out a gain of 400 jobs, a rise of one quarter of a percentage point.

By contrast, the private sector added 42,900 jobs in the first seven months of 2000 (up 1.27%), with 6,900 jobs coming from construction and 41,000 from service industries. These gains were marginally offset by a loss of 4,300 manufacturing jobs.

After the Attack
The true impact of the attack and its aftershocks on the New Jersey economy will show up initially in the state's employment data. However, the first measure of that impact won't be available until the NJ Department of Labor releases its October employment report in mid-November2.

Anecdotal evidence gathered in the first two weeks after the attack would appear to confirm the belief of regional economists that New Jersey slipped into a recession almost immediately following the attack.

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 ended 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 run 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.

Hughes said the exodus from New York could add at least 20,000 permanent jobs to New Jersey's employment base, an economic boon that will 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 ultimately may reap from the destruction of the World Trade Center, in the final analysis our economy is tied to the apron strings of the national economy. Although economists are hopeful of a rebound early next year, the ultimate outcome of the events of September 11 is beyond the ken of even the most prescient forecaster. Under even the most optimistic scenario, the seriousness of the current downturn should not be dismissed or taken lightly.

Evidence is mounting that other countries, including the European union, are following the United States into what is fast becoming a global recession of unknown depth and duration. Just as New Jersey's fortunes are tied to the nation, so too are the nation's fortunes tied to the world markets.

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 sent the world a message that they are anxious to revive a moribund economy.

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.

1 A recession is defined as two consecutive quarters of declining economic output, which in New Jersey is measured by the Gross State Product. 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 would put New Jersey in recession territory. Back to Emploment Watch

2 The data collected for the month of September was collected on the 9th day of that month, two days before the attack on the World Trade Center and the Pentagon.Back to Emploment Watch

Back to Emploment Watch

Back To News Center
 

Copyright© 2001 NJBIA
All RightsReserved. Reproduction in whole or in part in any medium
withoutexpress written permission is prohibited.