Hartford Business Journal

16 HARTFORDBUSINESS.COM | JANUARY 8, 2024 Economic Forecast Will CT revive its comatose economy? By Fred Carstensen C ongratulations to Gov. Ned Lamont and the legislature: They have put Connecticut's fiscal house in order. But fiscal health is unlikely to be sustainable when the state has a sickly economy. Now they must tackle the challenge of restoring Connecti- cut's economic vitality, competitiveness and growth. Since 2017, Connecti- cut's economy has seen only 1% real (infla- tion-adjusted) growth; the nation's economy grew 38% through 2022. There has been no growth in jobs: payroll employment is now where it was in June 2017. Taking a longer perspective, the performance is worse. Payroll employment in 2023 is merely 20,000 above where it was in February 1989, and 22,000 below where it was in March 2008. That's 35 years of essentially no net job creation. The story is the same for gross state product (GSP) during the last 15 years: essentially no growth. The result of this economic stagna- tion is that Connecticut's economy as a share of the national economy has shrunk markedly since 2008, by nearly 30% (from 1.6% of the U.S. gross domestic product to 1.14%). With the fiscal house in order, it is clearly time to prioritize the economy. Growth opportunities There are positive developments on which to build. Yale and UConn have transitioned into modern research universities, bringing millions of dollars into the state to support their research programs. They are also engaging in sustained efforts to generate economic development from this research through intellectual property transfer — facilitating creation and growth of spinoff businesses. Moreover, Dan O'Keefe, the new commissioner of the Department of Economic and Community Develop- ment, is supporting efforts to build strong collaborations between Yale and UConn to drive innovation, busi- ness creation and economic growth. The $200-million and 1,000-new employee expansion in Wilton by ASML — a leading maker of extreme ultraviolet lithography machines used to make computer micro- chips — should drive both growth in the supply chain (hopefully in Connecticut) and perhaps colocation by related businesses. Electric Boat is projecting the addition of 9,000 new employees as it ramps up production of a new generation of nuclear submarines to restore America's military capacity. IT growth Perhaps most important to future growth, for both keeping companies in Connecticut and attracting new businesses, is the millions of square feet of proposed hyperscale cloud data centers that could bring the state into the internet age. The projects in Waterford and Kill- ingly are already town-approved and moving through the permitting process. Connecticut was singularly inatten- tive to the IT revolution that began with Congress giving the private sector access to the internet in 1992. While other states quickly grasped the singular importance of this new technology, Connecticut did little; the state became a virtual black hole in IT, with small data centers and limited connectivity. Conversely, New York made a major investment in what is a very successful nanotechnology research center at SUNY Albany; the Massa- chusetts Institute of Technology and partners, with strong support from their state government, built the transformative, high-performance computer center in Holyoke. The new investments in the hyper- scale data centers — which can handle the massive requirements of artificial intelligence and the tidal wave of real-time data now at the heart of many businesses — will posi- tion Connecticut to become the locus of data processing for businesses in the Boston and New York metros. It is hard to see how Connecticut fully restores its competitiveness and builds its economy without the strong IT infrastructure these data centers create. The question now on the table is whether Gov. Lamont and lawmakers will adopt policies and invest the resources to permanently abandon the sad economic trajectory of the last decades. Most visibly, cutting investment in higher education would send a truly negative message to the private sector. Failing to make other critical investments or adopt aggressive pro-growth policies (e.g., permit- ting the use of stranded tax credits to offset the cost of major capital projects, similar to the 2014 Pratt & Whitney deal) would undermine, if not defeat, the opportunity to change Connecticut's economic trajectory. State policymakers must prioritize growth. 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. Expect moderate growth, lower interest rates in 2024 By Fred McKinney I n baseball, a player who is unsuc- cessful in hitting the ball 67% of the time over their career will be a first-ballot Hall of Famer. In basketball, a player that is unsuc- cessful on 33% of their free-throws is a liability, and is likely not to be on the court during "crunch time." Success in economic forecasting is based on whether the forecaster is better than random guesses at what is likely to happen. I admit last year, I was wrong in predicting an economic slowdown. I thought the Federal Reserve was going to cause a mild recession because of the stated policy of raising interest rates to cool off the inflationary pressures building up in the economy. It turned out that the Fed raised the federal funds rate (the rate banks lend to each other) from near zero in February 2022, to 5.33% today. Over that period, the federal funds rate increased 11 times, with four of those hikes happening in 2023. The two most-watched measures for the impact of these market inter- ventions are inflation and real gross domestic product (GDP) growth. On the inflation issue, since the first quarter of 2021, quarterly inflation dropped from a peak of 9.1% in the second quarter of 2022, to a low of 1.7% in the second quarter of 2023. There is no other way to describe this other than to say it is a remarkable success for the Fed. Real GDP did decline by 1.6% in the first quarter of 2022, but recov- ered to 4.9% growth in the third quarter of 2023. It looks like the combination of Fed policy and Biden administration fiscal policy has successfully brought down inflation without sending the economy into recession. It's like the Fed had a .350 batting average and made 98% of its free throws in 2023! In retrospect, it may be that the infla- tion we experienced was the result of pandemic-related supply chain disrup- tions that eventually turned around, and not other structural problems. 2024 predictions Eventually, the economy will have a recession, and I remain nervous about macroeconomic conditions in 2024. Federal Reserve policy will remain the dominant force that will determine the health of the U.S. economy. The federal funds rate has not been increased since July. This could repre- sent the Federal Reserve's view that the worst is over on the inflation front, and it might be time to encourage more economic activity by lowering rates in 2024. As a political economist, I know that the Fed is not supposed to consider political factors in its rate decisions, but you must wonder if the Fed has a bias in favor of four more years of a Biden administration than a return of the Trump administration, if those are the choices in 2024. The Trump administration frequently blurred the lines between executive branch policies and the Fed's independence. Institutionally, the Fed would prefer less interference, regardless of which party is in power. The Biden adminis- tration has been largely silent on Fed rate increases. This political view is consistent with a Fed policy that would lower interest rates in 2024, which would at least not further harm Biden's reelection efforts. Therefore, I predict 2024 will continue to experience moderate economic growth and a continuing decline in inflation, with unemploy- ment remaining near historic lows, and a lowering of key interest rates by midyear. Potential headwinds However, there are risks that could upend this positive projection. The Ukraine-Russia war is in its second year, and since Oct. 7, we have added the Israeli-Hamas war. Neither of these wars is good for the economy, although there are positive business impacts for defense industry companies that are supplying our "allies." A second major uncertainty is the 2024 presidential election. If Trump were to be reelected in November 2024, it would represent a return to chaos in the executive branch. If Calvin Coolidge was right in saying that the "business of America is business," a new Trump administration would take us away from that ideal, and the business of America would be, to use Trump's words, about "retribution." Political retribution is bad for busi- ness and the economy. Fred McKinney is the co-founder of BJM Solutions, an economic consulting firm. He is the emeritus director of the People's United Center for Innovation & Entrepreneurship at Quinnipiac University. Fred Carstensen Fred McKinney

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