Hartford Business Journal

Despite headwinds, U.S. and CT economies in good shape heading into 2022 By Peter Gioia " The sky is falling, the sky is falling!" I've been hearing this nonsense again, along with the complaint: "I can't afford to fill up my gas tank." Yes, we are in a changed situation from last year with over 5% Consumer Price Index inflation, but much of that is due to a short-term sharp spike in energy costs and another temporary spike in housing costs. We also have a medium-term spike in shipping costs. The only large sticky inflationary increase is the uptick in wages — and most people are fine with that. Overall, the economy is in and will be in relatively good shape given the rough conditions brought on by the pandemic. People who want to work will find that jobs are available and offer better wages. The market has generally stayed strong and resilient, despite the occasional bump, which will help the retirees and one's dependent on investments. Inflation has led to a 5%-plus rise in Social Security payout that will help the elderly. Health conditions, while seeing seasonal challenges, will gradually improve as more people including children get vaccinated. Omicron may cause a further delay in medical recovery, but the pharma giants say they should have a fix within a hundred days. Gas prices will slowly moderate as more refining capacity comes back online. The U.S. has lots of oil that could be pumped but without refining capacity that does not help. Overall, 2022 won't be a return to "normal" but will be the most normal we have seen since prior to the pandemic. I remain cautiously optimistic on U.S. and Connecticut growth throughout the year. U.S. conditions As of December, the U.S. was on pace for about 6.4% GDP growth in 2021, which is strong, with unemployment continuing to shrink to 4.2% at the end of November. Gas prices are high with an over 50% increase compared to the same time last year. Shipping prices are up with supply chain bottlenecks. But overall, it looks like holiday spending was on track for a good year despite some shortages or higher prices. Add to that the forthcoming stimulus as the massive infrastructure bill gets implemented. I think the Federal Reserve will be extra cautious as we are far from full employment and the delta and omicron virus variants pose a challenge. So, don't expect rapid and multiple interest rate hikes by the Federal Reserve. We may see a few, but they'll be spread out, quarter-point hikes. Connecticut and local conditions Connecticut has done remarkably well weathering the coronavirus. Continuing to positively address the virus remains a key to full recovery. Recent numbers show 6% unemployment, which has been going down each month for the last 11 months. We see private sector job growth at 3.6% year-over-year. By the end of 2022 we will likely recover the jobs lost in the virus recession. But more affordable child and elder care are needed to stimulate more female participation in the workforce. Meanwhile, expect more investment in labor-saving equipment and devices to make up for more of the worker shortage. International points Tourism weakness will persist in many countries. This will continue to trouble airlines and cruise lines. Over time it will be a drag on oil/ energy prices. There are still worries regarding potential conflict. Hot spots of Yemen, North Korea, Ukraine and the Belarus/Polish borders could all end up being real problems, though likely regional in nature. Certainly, downside risks persist. There could be more problematic coronavirus variants. Supply chain issues could be more stubborn than we think. Foreign oil producers could cut production. Tensions could flare in the Middle East disrupting the flow of oil. Ukraine could become a hot spot and North Korea could up its saber rattling. Illegal migration could prove difficult both for Europe and in the U.S. at the Mexican border. But none of these risks are likely to destabilize global or U.S. national growth. Have a happy and healthy 2022! Peter Gioia is an economic advisor to the Connecticut Society of CPAs and the former longtime economist of the Connecticut Business & Industry Association. ECONOMIC FORECAST CT has assets to change its economic trajectory. Can it leverage them? By Fred Carstensen W ill Connecticut's economy recover by 2025? By 2030? Connecticut faces a serious challenge to climb back to where it was in 2008, even 1987, not just in Feb. 2020, before COVID-19 shutdowns hit. Our economy never got back to where it was in 2008 in payroll employment, or in real (inflation- adjusted) state output. Now Connecticut is recovering more slowly than the national pattern and seems unlikely to regain its economic and competitive health for years. Focusing on employment statistics clarifies the scale of what Connecticut faces. As of Nov. 2021, employment in Connecticut was 1.624 million, 79,000 jobs below the most recent peak in Dec. 2018. Compared to the earlier employment peak in March 2008, the deficit is larger: 96,700 fewer jobs. More revealing is that this level of payroll employment is about where Connecticut was in March 1987. If, somehow, the state added 5,000 jobs a month — an unprecedented level of growth in recent decades — it would still be nearly two years before reaching the previous 2008 peak. But the situation appears to be worse. The Connecticut Department of Labor gives us both payroll employment, which is the number of people employed at Connecticut companies and in the public sector, but also the employment of Connecticut residents, regardless of where they work. As the economy struggled since 2008, tens of thousands of state residents — because they could commute from their home — took jobs out of state: employment of residents reached an all-time high of 1,855,700 in Nov. 2020. That employment has now collapsed: as of Oct. 2021, it was 1,703,300, about where we were in July 2005. Despite our flagging economy after the Great Recession, Connecticut did not lose population between 2010 and 2020, according to the U.S. Census. That was because neighboring states — Massachusetts, New York and Rhode Island — enjoyed robust growth in both employment and real output and offered ample opportunity for our residents to commute to new jobs. Some Connecticut businesses — e.g., Pfizer, GE Capital — also moved thousands of jobs to those states, compounding this dynamic. Those jobs, that opportunity, now seem to have disappeared in large measure; will those households, looking for new jobs, leave the state because they can no longer commute? Over the last decade, the state also lost thousands of high-skill, high- wage jobs as two leading sectors — nondurable manufacturing and finance/insurance — contracted sharply, while adding low-skill, low- paying jobs in tourism, hospitality, logistics and eldercare (none pay more than $40,000 annually working full time). The result has been a sharp contraction in income tax revenue from withholding of more than $500 million annually relative to aggregate household income (this includes income earned out of state, dividends and capital gains). Sales tax revenue relative to aggregate household consumption has declined annually more than $200 million. If these numbers are roughly correct, then Connecticut's fiscal stability is now dependent on highly volatile tax revenues from capital gains and dividends. Absent a change in its economic trajectory, Connecticut is likely to face robust deficits within a few years, after the rainy day fund is drained. But Connecticut has an advantageous location between powerfully growing metros, still offers an attractive (and competitive) quality of life, has a strong and expanding aerospace sector, the basis of a competitive biomedical sector, and, with the new data center legislation, the potential to build a strong IT infrastructure. History casts a long shadow; Connecticut has the basic assets that — with appropriate initiatives and investments — are the basis for growth. We can significantly shape our own future. Will we have the insight and courage to do what must be done? Fred Carstensen is the director of the Connecticut Center for Economic Analysis and a professor of finance and economics at UConn's School of Business. Fred Carstensen Peter Gioia 17 HARTFORDBUSINESS.COM | JANUARY 3, 2022

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