By Ryan Severino, CFA, Chief Economist
OFFICE MARKET
The U.S. economy has been growing consistently since mid-2009. Soon the current expansion will become the second-longest on record, no small feat given the impact of the Great Recession. But for New Jersey and many of its residences, it has sometimes felt like the Great Recession never fully ended. With the U.S. economy poised to accelerate in 2018, many expect that New Jersey will once again be left out of the party. Yet New Jersey’s economy should surprise many this year and generate its strongest growth rate since 2000.
WHY SO SLOW?
Since the U.S. economy began expanding in mid-2009 economic growth has averaged roughly 2.2 percent on an annualized basis. New Jersey’s annualized growth rate over that period registers roughly just 0.8 percent. In many respects, the fact the New Jersey’s economy has lagged the U.S. overall should not come as a surprise. New Jersey boasts a relatively large and mature economy – good traits that can make rapid economic growth more challenging. New Jersey ranks eighth among all fifty U.S. states by size of its economy. While an economy of that size provides work for many people, it also makes growth more challenging than smaller states. Moreover, the economy of New Jersey boasts many high-value, but mature industries, such as financial services and pharmaceuticals. These are important industries that provide many well-paying jobs, but don’t grow as quickly as other industries in the U.S. New Jersey has also shouldered some structural challenges. The relatively high cost of doing business, high cost of living and slow population growth are also among the factors that have contributed to high-profile corporate relocations out of the state and held the economy back in recent years.
SHIFTING INTO A HIGHER GEAR
Although we still expect that New Jersey’s growth will lag economic growth for the U.S. overall, there are reasons to be optimistic. Corporate tax cuts should provide a boost to New Jersey’s growth. Many industries important to state—such as financial services, construction and health care—pay some of the highest effective tax rates. Although the Tax Cuts and Jobs Act (TCJA) will help virtually all industries, the ones with the highest effective tax rates stand to benefit to greater extent than those with lower effective tax rates. The gradual easing of regulatory burdens, particularly in financial services, should also support faster growth. And New Jersey supports one of the “best-educated” populations and workforces in the country, with roughly 37 percent of the state’s residents holding a bachelor’s degree or higher. 31 percent of U.S. residents hold at least a bachelor’s degree. As the U.S. economy continues to move more toward high-value-add services, these workers take on increasing importance to growth. Noteworthy among these remains high tech, one of the fastest and most important industries to the economy. In particular, the Newark metropolitan area reports a greater share of high tech employment than the U.S. overall. Continued outperformance by this industry will also benefit the economy of New Jersey.
Some remain concerned about the impact that the limited ability to deduct local taxes will have on the state’s economy. However, research shows that most people do not decide where to live based on marginal tax rates. So we should not expect a mass exodus out of New Jersey that would adversely impact the economy. The positive factors listed above should cause economic growth in New Jersey to accelerate to between 2.5 and 3.0 percent in 2018. That would produce the fastest calendar-year growth rate since the days of the vertiginous dot-com bubble in 2000 and would represent a significant acceleration from the growth rates of recent periods. In New Jersey it might finally be time to buckle up.
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