It may seem counterintuitive, but despite the tens of billions of dollars in damage caused by Hurricane Sandy, a blue-ribbon panel of economists agreed that rebuilding after the storm could actually provide a short-term boost to New Jersey’s lagging economy.
The panel, assembled by the state Treasury Department yesterday, agreed that the enormous amounts of federal disaster aid and insurance money expected to flow into New Jersey in the months ahead could jump start a state economy that has sputtered since the Great Recession of 2007 to 2009 and grew only sluggishly in the four years before that.
The economists warned, however, that New Jersey has lagged behind the nation in its post-recession recovery, and is likely to continue to do so because of noncompetitive tax rates, high costs, past failures to invest in university research and development partnerships, and an ebb in high-paying pharmaceutical and financial sector jobs.
While Treasury’s Second Annual Garden State Economic Forum was supposed to focus primarily on long-range economic trends, preliminary assessments of the impact of Hurricane Sandy overshadowed other issues, beginning with Treasurer Andrew Sidamon-Eristoff’s acknowledgement that “there will be pluses and minuses with respect to revenues” in the budget for the current fiscal year that ends June 30, 2013.
Asked about New York Governor Andrew Cuomo’s already-announced request for $30 billion in federal aid to help cover the estimated $33 billion in damage caused by Hurricane Sandy in the Empire State, Sidamon-Eristoff said New Jersey officials were still tallying the storm damage, and that Gov. Chris Christie wanted to make an accurate assessment.
“The numbers are not complete,” Sidamon-Eristoff said. “Ultimately, what matters is that our numbers reflect the very best data we have, not that we put a number out there first.”
A History of Hurricanes
Sidamon-Eristoff said it would be logical to look at what happened following Hurricane Katrina in Louisiana, Hurricane Irene last year, and other natural disasters in assessing both the budget and the economic impact of Hurricane Sandy. It is that assessment that led several top public and private sector economists to conclude that the short-term impact of Sandy over the next 12 to 18 months would be a net gain for the state’s economy.
Charles Steindel, Treasury’s chief economist, summed it up when he concluded that production and sales lost in the storm would be made up quickly, while the impact of new consumer spending for reconstruction and repairs, much of it paid for out of Federal Emergency Management Administration reimbursement and insurance settlements, would be positive once it gets underway.
“In the short term,” said Steven Cochrane, managing director of Moody’s Analytics, “this could provide a little kick-start for the economy in the labor market. Fifty thousand construction jobs have been lost in New Jersey since the recession, 10,000 in the last year. Now, we can finally put construction workers back to work, and in a state where the construction industry has been so weak, that’s good.”
Cochrane warned that it would be “absolutely essential to get the Shore up and running, and get the word out that the Shore will be open for business this summer.” Tourism ranks as New Jersey’s third-largest industry, and the Shore makes up the lion’s share of that $35 billion tourism economy.
Joseph Seneca, university professor of economics at Rutgers University, expressed optimism that the beaches and boardwalks of the shore resorts in southern Monmouth County and on Ocean County’s barrier islands could be rebuilt in time to salvage much of the summer tourism season.
“It’s a long way to Memorial Day,” Seneca said, but he noted that much of New Jersey’s summer rental housing stock is made up not of beach hotels like other states, but small privately owned bungalows that rent by the week or the room, and it is hard to know whether they will be up for the season.
Rebuilding the Region
Unlike Florida, which can count on good weather year-round for construction, a harsh New Jersey winter could wipe out weeks of construction work. What’s more, untimely shortages of supplies like lumber and drywall, not to mention skilled labor, frequently hold up construction when people try to rebuild an entire region at the same time, as was the case with New Orleans and the Gulf Coast following Katrina.
Seneca offered the most comprehensive — and complex — “taxonomy” of the pluses and minuses for New Jersey’s economy as a result of Hurricane Sandy. In the immediate short term, Seneca said, income, sales, economic output, and state income and sales tax revenues would most likely suffer. “Fewer hours worked means lower income taxes paid, and the days in which stores and restaurants were closed means lower sales tax revenues,” he said.
Lost tourism revenues from the two weeks following the storm will not be made up, and businesses not related to storm reconstruction will likely postpone decisions on new business development and expansion.
However, the real loss to the state, Seneca said, is the loss of capital stock — housing, commercial and industrial buildings damaged or destroyed, infrastructure flooded by seawater, and inventories that were lost, such as the 16,000 new cars damaged or destroyed at Port Newark. “Not all of the losses will be covered by FEMA or insurance, and there will be a real loss of wealth by the owners of this property, especially individual homeowners, that will affect their future spending decisions,” Seneca said. More expensive homes could replace bungalows if the families that have owned them for two or three generations cannot afford to rebuild.
“Another complex question that no one has been raising is the effect on property taxes, as property owners begin to demand reductions on their property tax bills because their homes were damaged or destroyed,” he said. The rate of property tax collections is also likely to drop, causing financial problems for municipalities already laboring under the new 2 percent spending caps.
Overall, however, gains in economic activity in the wake of Hurricane Sandy are likely to offset the losses, and are likely to be reflected in visible gains in both employment and income, which are easier to measure than losses in wealth, Seneca said,
FEMA, other potential federal aid and insurance payments are likely to spur a flurry of post-storm rebuilding by households, businesses, and governments. In addition to actual reconstruction, consumers may push forward spending that otherwise would have been delayed, such as purchases of new cars to replace those totaled or damaged by the storm. Combined with public spending on infrastructure repairs, the multiplier effect of all this spending is likely to boost employment, including not only fulltime jobs, but also a lot of part-time work on cleanup and repair crews, and this will translate into higher income, higher consumer spending, and higher tax revenues, he said.
Seneca’s analysis mirrors post-Katrina studies of economic activity in New Orleans and along the Gulf Coast, where $25 billion in federal aid combined with billions in insurance payments and beefed-up state spending to produce a two-year surge in economic growth.
A similar flow of federal aid is not guaranteed, however. Thirteen U.S. senators from affected states, including New Jersey, New York, Pennsylvania, and Connecticut, yesterday noted that they would be asking for large-scale federal reconstruction assistance. But with President Obama and GOP leaders preparing to negotiate over the upcoming “fiscal cliff” — the expiration of the Bush income tax cuts and Obama payroll tax cuts, and scheduled deep cuts in both military and non-military spending — the Republican-controlled House of Representatives is adamant that any increase in federal spending be offset by spending cuts elsewhere.
New Jersey desperately needs an economic surge, because the state’s underlying economic fundamentals are not strong. The panel of economic experts agreed that New Jersey’s economic and employment growth rates are likely to lag behind the national average for years to come as a result of high taxes, high costs, a failure to invest in the university-based research and development clusters that attract high-tech businesses, and the ongoing ebb of high-paying pharmaceutical and financial sector jobs.
Joel Naroff, president and founder of Naroff Economic Advisers, warned that New Jersey cannot expect the robust income and job growth in the pharmaceutical and financial sectors over the next five years that fueled its economic growth in past decades. The state has lost more than half of its share of the national pharmaceutical industry over the past decade because of its failure to invest in high-tech R&D clusters. “The one bond issue we defeated in the history of the state was the one to help the pharmaceutical industry,” Naroff lamented, referring to the stem cell research center initiative.
“The speedy growth in the life sciences in states like California and Massachusetts is growing out of the innovative partnerships they created between their university programs in molecular biology and chemistry and their medical schools and hospitals to develop life sciences clusters where companies can do clinical research trials,” said Richard Bagger, senior vice president at Celgene Corporation and formerly Christie’s first chief of staff. “That’s where New Jersey fell behind.” The higher education alignment that gives Rutgers University a medical school and a cancer research institute is long overdue, Bagger said, but New Jersey has a lot of ground to make up.
Seneca noted that New Jersey has regained just 84,200 of the 250,000 jobs lost during the Great Recession – a 34.2 percent job recovery rate that ranks the state 33rd in the nation. Regionally, New York State has regained all of its lost jobs, added 45,000 more private sector jobs, and ranks fourth in the nation in job recovery, while Pennsylvania ranks eighth with 71.1 percent of jobs regained. Nationally, 53.3 percent of lost jobs have been restored.
Seneca said it could take until 2020 for New Jersey to regain the other 163,300 private sector jobs lost during the recession to return total state employment to its January 2008 peak of 3,445,800. Currently, state employment of 3,283,000 is the equivalent to January 1999 levels. “This is actually a very modest goal,” he noted. “We haven’t even talked about what it would take to get back to the 5 percent unemployment rate of 2007 because that would require enormous job growth.”
Andy Haughwout, vice president in the research and statistics group at the Federal Reserve Bank of New York, noted that New Jerseyans are carrying $63,000 in debt per person, the second-highest personal debt total in the nation after California. The lion’s share of that personal debt is in mortgages, reflecting New Jersey’s high housing costs, and 9 percent of New Jersey’s consumer debt is 90 days past due or greater, the fourth-highest rate In the nation after Nevada, Florida, and New York.
Overall, New Jersey median household income declined by 7.2 percent from $67,035 in 2006 to $62,181 in 2011; New Jersey has dropped from the highest household income in the nation to third behind Connecticut and Massachusetts.
Personal income has been rising in 2012, but slowly. “Is income going up in the state?” asked John Silvia, chief economist for Wells Fargo. “Yes. Is income going up as fast as it did in the last two recoveries? No. Yes, it’s a problem.”