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The Economy

What to Expect as a
New Decade Unfolds

By James W. Hughes
& Joseph J. Seneca
Edward J. Bloustein School
of Planning and Public Policy
at Rutgers Universtiy

In the last two years the once great American job-creation machine has been transformed into the great American job-destruction machine. As a result, 2008 and 2009 were dismal economic times for the United States and New Jersey, as the recession inflicted unprecedented fiscal pain at all levels of government. At some point in these annual economic assessments, we really want to provide an upbeat fiscal outlook for municipalities. Unfortunately, such an outlook is not in the economic cards for 2010, the start of the second decade of the new millennium. If it is any comfort, at least with respect to accuracy, our sobering analyses and less-than-optimistic forecasts of recent years have been entirely justified. For the first time since the Great Depression and the 1930s, both the nation and our state will exit a decade with fewer jobs than when it started. Thus, the past ten years deserves the title of “the lost economic decade.”

This is particularly shocking since there was such strong economic momentum built up during the final 20 years of the last century when the United States added approximately 18 million private-sector jobs per decade. There was unbridled optimism as the old millennium came to a close in 1999 and our economic future for the new century seemed boundless. Unfortunately, the reality of the first ten years of this century has proven to be so very much different. A recession began one year into the decade (2001), as the stock market bubble burst, and terrorist attacks shook the country profoundly. There was a tepid, sub-par mid-decade economic expansion whose fundamental weakness was masked by housing, stock market and financial sector bubbles. Then, in December 2007, the deepest recession in generations began, a slump whose impacts, especially on labor markets, is still damaging our country and our state.

During the 2000-2010 period, the United States will actually lose more than 2.5 million private-sector jobs, a stunning reversal of economic fortune. This is also the case for New Jersey. The state added approximately 243,000 private-sector jobs in the 1990s; during the current decade to date (September 2009) it has lost over 88,000 private-sector jobs. Consequently, both the United States and New Jersey face formidable employment deficits as 2010 unfolds.

This dismal performance has been heavily influenced by the Great (2007-2009) Recession, by far the worst post-World War II economic downturn. The year 1939 was the first year that payroll employment statistics were compiled in the United States. The largest annual employment losses of the eight-decade period from 1939 to 2009 occurred in the last two years—4.1 million jobs lost in 2009 (through October) and 3.2 million jobs lost in 2008. So, if you sense that many residents of your municipalities are struggling economically, these grim numbers confirm that. This has been the worst labor market since the Great Depression.

However, the recession is likely to have technically ended in the third quarter of 2009, when Gross Domestic Product (GDP)—the total output of the U.S. economy—grew by 3.5 percent (advance estimate). This followed four-straight quarters of declines in GDP. Thus, on a positive note, it is highly probable that the new decade has begun with the nation’s aggregate economic output on an upward trajectory, and that the worst recession since the Great Depression will be solidly in the rear-view economic mirror. This can only be good news for states and municipalities.

Nonetheless, this positive news must be tempered by the fact that the nation lost 588,000 private-sector jobs in the third quarter of 2009 alone at the same time that GDP grew by 3.5 percent—suggesting an economy enmeshed in a period of “job-loss” economic growth, i.e., employment losses have continued despite growth in national economic output. And in October, the first month of the fourth quarter of 2009, the U.S. unemployment rate jumped to 10.2 percent, the highest since April 1983, more than 26 years ago. This same pattern of job-loss economic growth and rising unemployment followed the 2001 recession, and it lasted 20 months. That job loss pattern is certainly an ominous precedent for our current economic situation.

So, the key question for 2010 is when will employment growth return? There will not be a realistic housing recovery, a sustained consumption and business capital investment recovery, and a tax-revenue recovery until employment starts expanding again. There are two principle hypotheses that bound future possibilities. The first, and best-case, scenario is that the national employment reductions have been so extraordinarily severe ( a loss of 7.3 million private-sector jobs between December 2007 and October 2009) that hiring will bounce back sharply as sustained growth in economic output is restored. That is, corporate America panicked and overreacted to the economic crisis by eliminating too many workers too fast, and they will now have no choice but to rehire at a rapid clip once sales pick up. This would suggest job growth resuming promptly in 2010 and that the bounce back would be quite strong. This is popularly known as a “V-shaped” recovery—a sharp downward plunge followed by an equally sharp rebound.

The second hypothesis—and much more ominous—suggests that despite extraordinary absolute employment cuts, many remaining workers have been put on part-time status. When additional labor is required due to business expansion, these workers will gradually shift to full time and then to overtime before new, robust hiring ensues. Evidence in favor of the accuracy of this hypothesis is that the current average national workweek is at record low level of 33 hours indicating a large amount of room to expand hours of the existing workforce. These conditions would lead to an “L-shaped” recovery, i.e., labor markets bouncing along the employment bottom for an extended period of time. This would be consistent with the “job-loss” economic growth pattern experienced previously this decade.

Whatever economic “calligraphy” reigns, the bottom line is that a significant labor market turnaround should not be expected until sometime in 2010, when the unemployment rate should peak and job losses abate. However, it will be a long road back to labor “normalcy.” Our recent study, America’s New Post-Recession Employment Arithmetic, suggests that a long period of robust job growth will be needed just to eliminate a ballooning employment deficit stemming from deep job cuts as well as the jobs required to accommodate the sustained demographic increase in the labor force. At the national level, we estimate that it will take until 2017 to get back to the labor market conditions of December 2007 (5 percent unemployment rate), the start of the national recession, even assuming sustained high-level job growth. New Jersey will track this national experience.

The new decade, starting in 2010, is thus destined to be a challenging one. Job growth will be the overwhelming imperative, a precondition for a rebound in tax revenues. One implication for municipalities is that they will face sustained competition from across the country in terms of economic development efforts. Every governor and every mayor will want to produce jobs for their citizens, and will be exerting all out efforts. New Jersey municipalities will have to respond in kind. As a result, all of our own jobs have just gotten permanently harder.

James W. Hughes is Dean of the Edward J. Bloustein School of Planning and Public Policy at Rutgers University.
Joseph J. Seneca is University Professor at the Bloustein School.



The article above was originally published in the January 2010 issue of New Jersey Municipalities Magazine


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