Although a solid 263,000 jobs were created nationwide in November within the context of a 3.7% unemployment rate, the US and New Jersey economies are nonetheless facing headwinds: Inflation remains high and the federal reserve’s attempts to control it by raising interest rates may be slowing the economy. Labor costs are also steep and are another factor that has contributed to employee layoffs at companies ranging from Amazon and Shopify to Netflix and Meta. And high energy prices, partly driven by the Russia-Ukraine conflict, are creating additional economic friction both in the US and abroad.
“If the [Federal Reserve] keeps raising interest rates, the probability is high that we’re going to have a weakening economy,” says economist James W. Hughes, university professor and dean emeritus of the Edward J. Bloustein School of Planning and Public Policy at Rutgers University. “Whether that leads to a soft [economic] landing or an industrial-strength downturn is open to question, but I think that’s going to be the defining element of 2023.” Either way, Hughes predicts New Jersey will remain economically “in lockstep” with the nation.
The Garden State has clearly been tracking the nation so far: As of October 2022, New Jersey recovered 104% of the jobs lost from 2020’s coronavirus-related “Great Contraction,” while the nation recovered a similar 103.6% of jobs.
While Hughes and other experts foresee a possible 2023 recession, the US job market had 10.3 million unfilled openings at the end of October 2022 (latest available statistic). Therefore, Hughes predicts companies could first reduce their number of jobs openings, then stop hiring all together, and afterward move toward layoffs.
“That’s when the pain begins,” Hughes explains, although he adds that businesses may be reluctant to engage in layoffs because they have already recently faced both labor shortages and time-intensive training for new hires.
Another person monitoring the economy, financial markets and the Fed’s activity is Michael Flower, managing partner at Fairfield-based Financial Principals. He saw the markets adversely react to rising interest rates in January 2022, followed by February 2022 market volatility in response to the Russia-Ukraine conflict’s opening salvo. The markets also reacted to various Fed rate increases throughout 2022. Inflation – as well as COVID-19 lockdowns in China that impact the supply chain – are also influencing the stock market, which is often dynamically separate from the economy’s performance.
Of note, the stock market was trading at approximately 22 times corporate earnings at the beginning of 2022, while at press-time it is more toward 15 times earnings. “Historically, if you are under 16 [times earnings] … that’s usually a good time to be buying into the market,” Flower explains. “It is not as strong as what we would have expected in the beginning of the year, but there’s still earnings growth; we feel earnings are in a good place and that the market is fairly priced right now.”
Financial Principles’ Associate Wealth Advisor Steve Gelber shares similar overall sentiments, and prognosticates a “short and shallow” 2023 recession based on consumers’ strong financial positions as well as healthy corporations. He adds: “If you wait until we’re out of a recession to invest again, you’ve already missed some of the upside, because markets are forward looking. That’s why it’s important to have a long-term [investment] plan.”
Long-term planning is also key in the energy sphere. The State of New Jersey’s Division of the Rate Counsel Director Brian O. Lipman notes that not only has the price of natural gas and electricity risen, but that costly, ongoing energy-related infrastructure work is occurring in New Jersey. Subsidies for offshore wind, nuclear power, and solar are additional costs affecting ratepayers, with subsidies for battery storage potentially on the horizon.
Regarding energy infrastructure work in New Jersey that has occurred over the past decade, it essentially presumed low commodity prices, which have since evaporated, with the work now resulting in steeper price increases for ratepayers.
Lipman notes overall, “Your gas and electric are going to go up just because of the infrastructure building that [will take place] in 2023.”
New Jersey’s industrial real estate arena is arguably a more positive scenario. The market is white-hot at press time, with asking rents about 34% higher when compared to a year ago, and north/central New Jersey vacancy rates close to 1%, according to Michael G. McGuinness, CEO of NAIOP NJ. Real estate giant CBRE cites record-low industrial market availability in the third quarter 2022, marking 23 consecutive quarters of positive absorption.
Such growth stems from an ongoing e-commerce boom, land constraints in New Jersey, which drive up prices here, and from trucking- and labor-related issues at West Coast seaports. Delays there mean that ship owners often move their goods to other ports, including those in New Jersey.
However, the super-strong New Jersey industrial market may not have such an intense fervor in 2023. Citing global and national economic headwinds, McGuinness anticipates “a slowdown in the [industrial] market, and you’ll probably have an uptick in vacancy rates.”
Vacancy rates are unfortunately already high in the office market, which bore the brunt of the coronavirus pandemic’s work-from-home edicts and the resulting hybrid work sea changes.
McGuinness estimates there was a 25% central-north New Jersey office market vacancy rate at the end of September 2022, albeit newer Class A office buildings with “all the latest widgets” that are “located in the right places” are faring better than the Garden State’s outmoded properties. McGuinness says hybrid employee work schedules, as well as corporate restructurings and various business closures, will likely foster a 2023 office market deceleration.
The health insurance sphere has its own set of woes, with New Jersey’s small employer market the smallest it has ever been in terms of lives covered, according to Linda J. Schwimmer, president and CEO of the New Jersey Health Care Quality Institute. She says it has shrunk from having once covered more than 1 million lives to covering fewer than 300,000 today.
Annual double-digit premium increases are driving employers with healthy/easily insurable employees out of this regulated market and into the unregulated market, the latter which may be less expensive, but is not always required to comply with various mandates. The result is that the regulated small employer market is increasingly becoming a high-risk pool of last resort for groups that are unable to obtain insurance elsewhere. The market may have even entered an insurance “death spiral.” Schwimmer notes, “… it feels like we are either [at that point] or very close to there.”
The underlying cause for New Jersey’s small group market’s woes is essentially due to its plans’ outdated and rigid provisions, she says, such as formularies that require every pharmaceutical on the market to be both medically covered and available; that can drive up insurance premiums.
And while healthcare benefit costs are rising in New Jersey and across the nation, other hot 2023 healthcare topics in New Jersey will center on reproductive and maternity care as well as improving primary care, Schwimmer says.
But the economy is top of mind. With the Fed’s orchestrated rising interest rates designed to combat inflation, the words of former Federal Reserve Chairman William McChesney Martin, spoken in 1955, may ring truer that ever: “The Federal Reserve … is in the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up.”
Rutger’s James W. Hughes concurs: “That’s what [the Federal Reserve] is doing right now.”
To access more business news, visit NJB News Now.