Robert Dye, vice president and senior economist for the PNC Financial Services Group in Pittsburgh, does not have much positive to say about prospects for the near-term New Jersey economy. He believes the economy is heading into a recession and will remain weak for the first half of 2008.
Dye is particularly sensitive to how economic factors affect businesses’ decisions on where to locate – the subject of his dissertation being the impact of regional price differences in energy prices on manufacturing employment in the United States – and he believes New Jersey is very vulnerable. The state is facing what he says are inescapable increases in its relative tax burdens to improve its financial situation.
One way or another – either through higher fees on toll roads or some other form of taxation – New Jersey has no alternative but to address its fiscal issues, says Dye. Yet its decisions will also have consequences. "I think the overall effect of whatever form it takes will be depressive on the state economy," he says. New Jersey is a small state surrounded by other lower-cost areas – Pennsylvania, Delaware, and upstate New York – and as New Jersey businesses are hit with tax increases, he says, all other things being equal, there is a tendency for business to move out or not move into the state.
"I appreciate the difficult position that Governor Corzine and the legislators are in – trying to address fiscal issues that predate many of them," says Dye. "He has chosen to address them, but it is going to come at a price."
Dye will be the keynote speaker at the Mercer County Economic Summit on March 27, at 3:00 p.m. at Mercer County Community College’s Conference Center, 1200 Old Trenton Road. Dye will speak after opening remarks from Mercer County Executive Brian Hughes. To register, go to www.princetonchamber.org.
A panel discussion on "Higher Education as an Economic Driver" will be moderated by Philip R. Hopkins, vice president of research at Select Greater Philadelphia; one on "Demographic Dynamics and the Mercer County Economy" by Kevin Drennan, executive director of New Jersey Commerce Commission; and one on "Tourism – How Sports and Entertainment Drive the Local Economy" by Jeff Hall, partner at Fox Rothschild.
Dye offers several observations about economic factors affecting New Jersey:
The national recession will be relatively short and mild. Despite his gloomy assessments about New Jersey, Dye says the general economy should fare well. The reason, he says, is because of the economic stimulus already in the pipeline.
The first important stimulus has been the significant cuts in short-term interest rates by the Federal Reserve, leaving the federal funds rate – the rate banks charge one another for overnight loans – at 2.25 percent. The second is a fiscal stimulus plan passed by Congress and signed by the president, which works on several fronts. It includes a tax rebate that will put up to $1,200 into the hands of most families by May. It also includes accelerated depreciation schedules that will encourage business investment. Finally, areas with higher incomes will see a rise in mortgage loan limits for conforming loans, that is, loans eligible for a conventional rather than a jumbo mortgage. The actual limits will be set as a percentage of median household income. The consequence will be lower-cost mortgages available to more people in New Jersey; the prior limit was $417,000 for all homes in the United States.
Repercussions of the sub-prime mortgage crisis are likely to continue. "With Bear Stearns imploding and being bought out by Morgan Chase, I will not be surprised to see more blood on the streets around Wall Street before it is over," Dye says. "But I think the Federal Reserve has been aggressive and innovative to develop new programs to contain the sub-prime meltdown."
Suggestions that the bailout is "welfare for the rich," says Dye, are the purely anti-capitalist view – let the market suffer and wring out the excesses, and the people who get hurt deserve what they get. But he emphasizes that the damage inflicted by the sub-prime crisis is reaching to all levels of the economy. "It is not just people who made risky investments, but the broader economy that is vulnerable," he says, "and many people would get hurt if the Federal Reserve did not do anything." Real estate agents and construction workers, for example, are being hurt very significantly but bear no culpability.
The banking industry will emerge stronger and have more ability to manage the risks associated with mortgage-backed securities and similar instruments, Dye says. The industry is going through a painful learning curve dealing with these fairly new financial instruments, which have never been stress tested. "We have never fully understood how an economic downturn would affect the viability of these instruments and the ratings on these instruments," he says. "What we are living through now is basically a lab that is going to give us very real data."
The pros and cons of outsourcing are getting clearer. As we are starting to get a better understanding of the benefits and negatives of outsourcing, the rate at which many industries are doing so is slowing, says Dye. The biggest downside he sees is the ability to provide good customer service in the face of language and cultural issues and tremendous distances.
New Jersey’s competitiveness in attracting high-tech businesses is weakening. "New Jersey and every other state are doing everything they can to promote high-tech industries that generate a substantial tax base for municipalities, employ highly educated people, and pay high wages," says Dye. But the competition is immense, and the tax issues will hurt New Jersey. "It is already known as a high-tax state," says Dye, "so the prospect of raising taxes does hurt its competitiveness."
A more stable Philadelphia economy may give central New Jersey a boost. "It is fortunate that parts of central New Jersey are more tied to the Philadelphia economy, which is looking fairly stable and may offer some stability to New Jersey," says Dye. But on the flip side, northern – and to some degree central – New Jersey is closely tied to the economy of New York City, which is now weakening. "It looks like New York is getting past its peak, with the implosion at Bear Stearns and layoffs in other financial services concerns," he says.
Dye’s father retired from his Air Force career when Dye was 10 and moved back to his hometown, Marietta, Ohio, where he started a land surveying company. Dye’s mother ran restaurants, including the well-known Betsy Mills Club.
Dye earned a bachelor of science in petroleum engineering in 1982 at Marietta College and, after working in the petroleum industry, went to the University of Pennsylvania to study energy management and policy. He was particularly interested in how energy price cycles affect the economy, but the longer he stayed, the more his interest turned to what he calls "pure economics."
After his dissertation he worked in the late 1980s and early 1990s with Wharton Econometric Forecasting Associates, a private economic consulting and forecasting group that grew out of the Wharton School. He then spent several years at Moody’s Economy.com in Westchester, Pennsylvania, and then at Capmark Investments in Horsham, Pennsylvania.
Dye moved to PNC Bank last August to work with its chief economist, the nationally known and respected Stuart Hoffman. Because the group is small, Dye gets to work on a wide variety of issues, from regulation to the United States and international economies.
New Jersey still has a few good cards in its hand, Dye suggests. The state offers a very highly trained, educated work force and great educational institutions. There has been a lot of new investment in the Atlantic City redevelopment. And because global economies are mostly holding up and the value of the dollar is low, export-based businesses in New Jersey still have solid markets.
But the coincidence of a recession and the budget crisis is unfortunate. "My feeling is there are no easy answers," says Dye. "Unfortunately this budget crisis is hitting just as the economy is falling into recession. It will put an added burden on the state in terms of a lower tax base."
Whereas Dye is pretty certain that the United States economy will turn around later this year, he is less sanguine about New Jersey’s prospects. "It will help to lift the New Jersey economy, but New Jersey has its own dynamics that do threaten to mitigate some of that positive effect."