Hartford Business Journal

BOOK OF LISTS 2020 | 7 CT's economic, fiscal struggles continue By Fred Carstensen Director of the Connecticut Center for Economic Analysis; Professor of Finance and Economics, UConn's School of Business C onnecticut is struggling. While steadily adding jobs since 2010, total employment is still about 17,000 jobs below its 2008 peak, and the real val- ue of state output contracted until 2018, shrinking nearly 10 percent. Our economy in 2018 was about the same size it had been in 2004. Growth returned in 2018 and 2019, but it has been among the lowest rates in the nation. Critically, high-wage sectors began losing jobs even before the financial tsunami of 2008: information — the sector seeing the fastest growth nationally in jobs and value of output — steadily lost jobs, from nearly 40,000 in 2003 to less than 32,000 in 2018; finance and insurance employment contacted from more than 122,500 in 2003 to less than 104,000 in 2018; manufacturing jobs fell from almost 200,000 in 2003 to 160,500 in 2018. State and local government contracted sharply after 2008, losing about 22,000 po- sitions. But employment in sectors with lower wages grew strongly: health care and accommodation and food jobs. Connecticut has been systematically replacing higher-wage jobs with lower-paid jobs. Worryingly, Connecticut saw contraction in what nationally are the most dy- namic sectors, which means it may be increasingly difficult for Connecticut to recover its economic vitality. Because job opportunities have been limited in Connecticut, residents here found out-of-state jobs. The result has been a significant improvement in household income, but a sharp contraction in state income tax revenue (by nearly $500 million) since people pay their state income tax where they work. And as consumption patterns have shifted, Connecticut's Swiss cheese sales tax has failed to keep pace: its revenue has declined more than $200 million relative to aggregate household consumption. The weakness in the state's revenue system — collecting about $700 million less relative to the tax base — sharply worsens the fiscal crisis plaguing Connecticut. While the vastly strengthened Rainy Day Fund is good news, projected deficits will soon exhaust it; then the underlying issues with income and sales tax revenues will present new fiscal challenges. Connecticut does have significant capacity to revitalize its economy and restore its competitiveness. Most obviously, the state has a large, powerful aerospace sector, with Pratt & Whitney enjoying huge demand for its new geared turbofan jet engine and Sikorsky continuing to thrive. It also has a significant presence in health care and the biosciences with Jackson Lab, the Yale New Haven medical complex and UConn Health. Encouragingly, development of a large fuel cell complex in New Britain will be — hopefully — the foundation for a massive data center, helping boost Connecticut's historic weakness of IT infrastructure. The challenge for Connecticut is how to build on these assets. The most obvious imperative is development of strong workforce training programs as each sector faces significant challenges in recruiting an adequate workforce. Parallel to such programs, the state should facilitate strong collaborations among our public and private universities to strengthen human capital and generate the critical cutting-edge research needed to keep companies fully competitive. These collaborations should focus on three critical sectors: aerospace manufactur- ing, biomedical and information technology. Finally, the state should move away from its historical reliance on one-off incen- tives to individual companies and adopt a broad program that allows companies to use stranded tax credits to fund major capital projects, similar to the agreement that persuaded United Technologies Corp. to rebuild its world research facilities in East Hartford and expand its Middletown Pratt & Whitney factory. Done correctly, the state forfeits no net revenue, but could generate tens of thou- sands of new permanent jobs. Connecticut has the capacity to shape its own economic future. Are we up to the challenge? 2020 recession threat overblown, but CT not poised for growth By Pete Gioia Chief Economist of PGEcon LLC, Pete Gioia Economics W orries over a U.S. recession in 2020 are way overblown. We are seeing a global slowdown and impacts from trade troubles across the U.S., but not at a level likely to derail modest growth through 2020. Major forecasters such as Wells Fargo expect moderate growth into 2020. This is good news for Connecticut as our growth is much weaker than the U.S. and we need stronger U.S. customers to continue to buy our manufactured products and services like insurance. While there still is serious political risk, most of it is election related. There is, of course, heightened concern about conflict, especially in oil-producing areas, but the U.S. is in a strong position to weather, and in some cases benefit from an oil price spike as we are energy self-sufficient and becoming a great exporter of energy. There is also risk from tariffs/trade wars, but the U.S. and China are talking, though the good and bad news on that changes almost daily. Finally, the Fed sees continued growth right now and signals a willingness to step in if at any time that falters. Connecticut has great economic potential but is falling short on benefitting from this potential. We have great manufacturing, especially in aerospace and defense, that will help us for at least the next generation. We have a solid, if struggling financial- services sector. Connecticut business confidence is mixed. There's a lot of confidence in the U.S. economy and in own-company performance while confidence in the Connecticut economy is weak. For Connecticut in 2020, the most likely scenario is slow growth, barely avoiding a state-specific recession while the rest of the country grows. I see job growth under 10,000 net new workers, slow housing growth and stagnant prices and continued net outmigration. Most businesses will see profits while doing all they can to cut prices and increase automation and technology. I see more Connecticut companies developing new products or services but making these products or services increasingly out of state. We are hampered by a lack of qualified workers, weak job growth and burdensome government regulation and taxes compared to most competitor states. Our business morale is terrible as seen in recent surveys. These problems are holding us back and result in bad effects in areas like housing, tax base, outmigration, and inability to attract enough firms from out of state. How do we address these dilemmas? We need to have a moratorium on new government regulations to improve business confidence to invest in Connecticut. We need a major effort building upon successful models to massively grow skilled manufacturing workers and better educate inner-city youth. We need to turn much of our prison population into productive workers rather than tax-dollar drains upon reentry. We need to stop squandering tax dollars on overtime and failed models. We need to immediately address transportation bottlenecks on I-95 and I-84 and in rail connectivity. Finally, we must recognize and address the fact that other states, including neighbors, are eating our economic-development lunch. Failing major efforts in these areas, I see continued subpar performance in Connecticut as others prosper and grow stronger. ECONOMIC FORECAST

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