As New Jersey and the nation head into the most promising year of economic growth since 2000, one cylinder in an otherwise purring engine is still misfiring-job creation.

Even as factory production is picking up and businesses are making long delayed investments in new plants and equipment, employment growth is sputtering. Employers in New Jersey and the nation have shown a reluctance to hire more workers until they can see a sustained pickup in new business. They have been able, at least in the early stages of this expansion, to meet customers' demands by making their shops more productive.

However, a majority of economists, both in the region and the nation, say job growth will assuredly pick up in the first half of 2004 as businesses continue to crank up production in response to rising demand.

With the addition of 29,400 private sector jobs in 2003, New Jersey is certainly ahead of most states. However, a closer look at the employment data shows that the State's employment growth petered out in the second half of the year.

New Jersey's private-sector employers tacked on a miniscule 3,400 jobs between July and December after adding 26,000 jobs in the first half of the year. Employment growth slowed in most sectors. Ironically, the manufacturing sector saw the most improvement in the second half as its job losses slowed to a trickle following three years of dramatic losses.

Although its job growth has sputtered, New Jersey's unemployment rate has fallen steadily. It reached a post-recession low of 5.3 percent in December, down from a six-year high of 6.2 percent in July. The current jobless rate remains well above the February 2001 low of 3.4 percent reached at the end of the last economic expansion.

Taking a look at the details of employment growth in New Jersey, the net addition of 29,400 private sector jobs last year represented a gain of nearly 1 percent. This was a welcome change from a net loss of 14,000 jobs in 2002 and 53,300 in 2001.

Regional economists say they are confident that in 2004 New Jersey will easily recoup all of the remaining jobs lost in the recession and then add some. Rutgers University economist Jim Hughes said recently he expects the state to add as many as 70,000 jobs this year.

Most of last year's employment gains came in the State's private-sector service industries, which added 32,300 jobs for a gain of just over 1 percent. Construction employment edged up by 4,100 jobs, for a gain of 2.6 percent.

Manufacturing employment fell by 7,000 jobs, a decline of 2 percent, which was actually a welcome improvement over the loss of 60,400 factory jobs in the previous two years combined. The total recession loss of 67,400 production jobs, a 15 percent retreat, continues a pattern of accelerated losses during recessions. The state's manufacturing employment has remained stable or declined only modestly during periods of rapid economic growth. Since 1979, New Jersey has lost nearly 450,000 factory jobs or about half of its manufacturing employment base.

Employment in the information services industry, which includes the hard-hit telecom sector, is still 19,200 jobs below its pre-recession peak. Trade, transportation and business and professional services also have yet to recoup all of their recession losses.

The US Economy

Ultimately, the fate of the State economy is tied to the fate of the national economy. Fortunately, the outlook for the national economy is the best it has been in more than three years.

The recent surge in business spending and factory production, coupled with continued strength in consumer spending and housing sales indicates that a vigorous and sustainable economic expansion is underway, economists say.

A nagging worry, however, is weak to nonexistent employment growth. The nation's private-sector employers collectively added a miniscule 14,000 jobs in 2003. A surge in new jobs in September turned out to be a false start, as only 1,000 jobs were created in December. But many economists are betting the economy will hit its stride this spring and will soon be adding 150,000 jobs a month.

Labor market experts note that the disappointing employment numbers are at odds with other data pointing to a more rapidly expanding labor market. This data includes a decline in the number of people receiving state jobless benefits and a healthy increase in help wanted ads since May. The national unemployment rate also has fallen from a high of 6.4 percent last June to 5.7 percent in December.

One problem with the government's monthly employment survey, especially in the early stages of a recovery, is that it fails to count the jobs created by startups. These startups could be adding tens of thousands of new jobs every month, jobs that ultimately will be counted when the government revises its employment numbers later this year, labor market experts say.

Putting aside the employment puzzle for a moment, virtually all other data points to an economy that is hitting solidly on all cylinders.

After two years of hunkering down to conserve cash, business executives are spending money to build their inventories and upgrade their plants and equipment.

This has been the driving force behind a recent surge in economic output. The economy grew at a 8.2 percent annualized rate in the third quarter of last year and was expected to have grown in the 5-6 percent range in the fourth quarter.

Inventory building has boosted manufacturing activity and output, giving new life to a sector that had been in the doldrums for three years. In December, manufacturing activity grew at its fastest pace in 20 years. For the entire fourth quarter, factory production grew at a 6.6 percent annualized rate, the fastest growth in three and a half years. Spending on high-tech equipment alone rose by 34 percent in the fourth quarter.

Regional surveys by the Federal Reserve Banks of New York and Philadelphia provide ample evidence that New Jersey manufacturers are participating in this upswing. Manufacturing activity in the New York region, which includes North Jersey, rose to a record high in January of this year, following nine months of improvement. Manufacturing activity in the Philadelphia region, which includes South Jersey, hit a ten-year high in January after eight months in positive territory.

The brightening manufacturing picture is marred, however, by durable goods orders that fell in November and were flat in December, a possible harbinger of an impending slowdown. Warned Commerce Bank Chief Economist Joel Naroff: "Never underestimate the uncertainties in an economy. We all thought that manufacturing's bad times were behind us and only good news would be in the data, but that is still not the case."

A cheaper dollar and rising global demand have also helped to push the economy into high gear recently. These two factors together have led to a 40 percent increase in exports since last August.

Through all of this, the housing market has remained remarkably strong and resilient. Combined sales of new (1.085 million) and existing homes (6.1 million) rose to a record 7.19 million in 2003, beating last year's record.

Underlying the economy's ability to grow are continued low interest rates, which make it cheaper for people to buy houses and businesses to make capital improvements. On January 27, the Federal Reserve kept its short-term interest rate target at a 45-year low of 1%.

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