Soaring Energy Puts Jersey At Risk

From the Star Ledger:
Soaring energy costs puts Jersey at higher risk
BY JAMES W. HUGHES AND JOSEPH J. SENECA

"Sharp surges in energy prices have been associated with three of the last four recessions in the United States. The first of these was the national downturn of 1974-75, which for New Jersey turned out to be the worst recession since the Great Depression. Its severity was linked to a state economy still highly dependent on an aging, inefficient, energy-intensive manufacturing sector. That recession helped precipitate a manufacturing employment hemorrhage that persists to the present day. In the 1970s, manufacturing quickly migrated to lower-cost Sunbelt states."

"Subsequently, the recession of 1980-82 -- the nation's worst recession since the Great Depression -- and the 1990-91 recession also occurred when there were spikes in the price of oil and related energy sources. Only the most recent recession of 2001, caused by the bursting of the information-technology investment and stock market bubbles, was unrelated to energy."

"If an energy cost related recession once again strikes the nation, New Jersey will be particularly hard hit due to several factors. One of the most critical is that higher energy costs will force businesses and people to reduce other costs. New Jersey is already a high-cost place to do business, and a high-cost place to live. This competitive disadvantage has led to population out-migration to more affordable states. Similarly, white-collar corporate America, facing intense global competition and the imperative to control costs, is now directing its high-end investment and expansion largely outside of New Jersey."

"But what are the effects of high-energy prices on individuals and households? Shouldn't New Jersey's high income and wealth provide a better-than-average buffer against soaring energy costs?"

"On the surface, the answer would seem to be yes. According to the Census Bureau's 2004 American Community Survey, New Jersey's median family income continued to rank number one among the 50 states. Our median family income was 38 percent higher than that of the nation. However, New Jersey also ranked number one in median housing costs (for owner occupied units with a mortgage) and our housing costs were 52 percent higher than the national average. Thus, our high-income advantage is largely offset by much higher costs of living."

"Expansions in the United States do not have a natural lifespan the Federal Reserve usually murders them. As soaring energy costs raise the specter of higher inflation, the Federal Reserve is likely to continue to raise interest rates. Thus, the effect of higher energy costs directly on the consumer and the economy, and the secondary impact via higher interest rates, certainly places the national economy at more risk as we move into 2007. If an energy-related recession comes, the impacts will not be pretty in New Jersey."