Is New Jersey The Next Michigan?

If a rising tide lifts all boats, then naturally, as Warren Buffet says, "only when the tide goes out do you discover who's been swimming naked." It appears that New Jerseyans have been swimming completely bare and in the moonlight for quite some time. It was not always the case. Besides being the whipping boy and the low hanging fruit for comedians bent on exhausting the irony of the Garden State, New Jersey once had a dynamic and diverse economy.

New Jersey has successfully adjusted to changing economic climates in the past. Over 150 years ago, the agricultural-based economy matured and became an industrial and manufacturing-based economy. Paterson became "Silk City". Trenton was "Trenton Makes What the World Takes". Camden became "On Camden Supplies, the World Relies". You could say resourcefulness and salesmanship is in the DNA of New Jerseyans. However, the consistency of their financial success is most likely attributable to the geography and being within a stone's throw of New York City, Philadelphia, Washington D.C and Boston.

In the early 1980's New Jersey completed another transformation, this time to a post-industrial, knowledge-based, high business IQ economy. Businesses flourished in the upper echelons of the pay scale; telecom providers, pharmaceuticals, financial services and information services. Everything that was touted as the very best of America's new "finance driven economy" was within New Jersey's footprint. In 1990, New Jersey had 20% of the nations pharmaceutical jobs. Jobs that average $100,000 a year. Worries were cast aside that they no longer needed the manufacturing sector as ballast. Property values soared, running commensurate with New Jerseyans rank as first in household income and third in per capita income. Tony Soprano was flush. All was well...

The Gathering Storm

New Jersey's tax code use to be a friendly partner to business. Today it is ranked 49th out of 50 for state business tax climate. It's declining cost competitiveness is forcing those hands that once fed the coffers of the State and the people elsewhere. Whether it is the Sunbelt or friendlier international suitors, the depth and job diversity is thinning. For example, whereas in 1990 the State had 20% of the nations pharmaceutical jobs, today New Jersey has only 10% and it is declining rapidly. Comparatively, the State is one of the most expensive places to live, with an overall cost of living 32 percent above the national average. Real estate, rent, property taxes and insurance are high.

Similar to New York City, New Jersey is just arriving at the new great depression in real estate. Interestingly,

"New Jersey was one of just three states (besides Indiana and Alaska) where home sales actually increased from the year-ago period, rising 4 percent in the first quarter, the NAR said."

Just like the stock market was the last to unwind with the credit crisis (real estate peaked in June 2006, credit peaked in early 2007, the stock market in October 2007), New Jersey appears to be following a similar trajectory. It should be no coincidence, since 30% of the State's high paying jobs come from Wall Street or a street running parallel to it. Just look at Jersey City.

"Workers, Mayor Worry City's Giants May Lay Off Thousands

Tuesday, September 16, 2008
By CHARLES HACK
JOURNAL STAFF WRITER

With the grim financial news from AIG, Lehman Bros. and Merrill Lynch, much of the speculation in the Downtown Jersey City financial district has concerned how many employees will keep their jobs.

The Dow Jones Industrial Average plummeted 504 points yesterday after being slammed with the double-barrel news that Lehman Bros. was declaring bankruptcy and Bank of America would be buying investment banker Merrill Lynch for $50 billion - half the price it would have cost a year ago. News also came through that insurers American International Group reportedly asked the Federal Reserve for a $40 billion bailout.

All three companies have offices at 101 Hudson St., while Lehman Bros. has an office on Hudson Street and Merrill Lynch has one on Greene Street. Lehman Bros. employs 1,700 in Jersey City while Merrill Lynch has 1,500 jobs in the city. AIG refused to say how many employees it has in Jersey City, but one estimate puts it at around 200.

Jersey City Mayor Jerramiah T. Healy fears that between Lehman Bros. and Merrill Lynch, thousands of jobs could be lost in the city with a deep effect on Downtown restaurants, bars and stores. "It is bad enough that 2,000 people may lose their jobs," Healy said. "But it's made even worse by all those satellite businesses that rely on the foot traffic." Gov. Jon Corzine said yesterday that between one-quarter and one-third of New Jersey's economy depends on Wall Street, either directly or indirectly."

Just The Tip of The Iceberg

For those New Jerseyans who thought there may be a silver lining somewhere... guess again. To truly be horrified as to what is coming down the pike fiscally, look no further than the ever prescient, Mike Shedlock at http://globaleconomicanalysis.blogspot.com/.

"The state of New Jersey is insolvent. Bankrupt might be a better word. New Jersey is $60 billion in the hole on pension funding and the Governor is planning on skipping payments in a "pension payment holiday" until 2012 so as to not increase property taxes.

The Star Ledger is reporting New Jersey pension funds lost $23B so far this year.

New Jersey's pension fund has lost more than $23 billion this year, dropping to its lowest level since 2003 as a collapsing financial market battered its investments, a new state report shows.

The latest losses -- nearly $9 billion in October, and another $3 billion so far this month -- mean the fund is now worth $57.8 billion, or less than half the $118 billion in benefits it is due to pay out over time.

What Happens Now?

New Jersey is burning $5.2 billion a year. If the market is flat over the next 5 years, New Jersey will have a minimum of $118 billion in obligations and will be sitting on $31.8 billion. But what happens if the S&P falls to 450 or 600?

S&P 500 at 600 would be a drop of 24% from here. Assuming the pension plan assets dropped the same, plan assets would fall to $44 billion. On a drop to 450 on the S&P, plan assets would fall 43% from here to approximately $33 billion.

At $5.2 billion a year, New Jersey's pension plan would be completely out of cash in about 6 years in my worst-case scenario of a drop to 450 on the S&P.

However, even on a drop to 600 or 700 on the S&P (highly likely in my estimation), New Jersey, would run out of cash rather quickly putting in $1 billion a year and taking out $5.2 billion a year while assuming growth rates of 8.5% that are totally unrealistic." - Mike Shedlock

In many ways New Jersey is an amplified microcosm of the broader problems we face as a nation. Too much debt, too many entitlement promises, too much consumption, too high taxes, not enough savings and an economy much too dependent on creative finance. It is up to our leaders now globally, nationally and locally to make the hard decisions and to put us on sounder financial footings.

It only seems appropriate to end with a quote from New Jersey's own Tony,

"She was part of that generation who grew up during the Depression. But the Depression to her was like a trip to Six Flags." Tony Soprano