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16 Hartford Business Journal • decemBer 28, 2015 www.HartfordBusiness.com BOOK OF LISTS 2015-2016 Economic Forecast CT's state of uncertainty By Fred Carstensen C onnecticut's economy is struggling. But this is a struggle long in the mak- ing: It has been true since 1990. For 25 years, Connecticut's economy has essentially failed to create additional jobs; from 1989 to 2009, Connecticut had the worst jobs record in the nation. Worse, the jobs lost over the years have often been replaced with jobs with lower wages and benefits, as Comptroller Kevin Lembo has highlighted. Add to this long-term malaise the onslaught of the Great Recession, in which Connecticut suffered the longest recession in the nation (2007 through 2011) as measured in real output, not employment. It lasted for over 17 quarters, even as the nation began to recover in 2009. Connecticut also had a recovery weak- er than any other state save Nevada; at the end of 2014, Connecticut's output was still more than 5 percent below its peak in 2007, just as total employment is still below its peak in early 2008. Singularly strong investments in biosci- ence (Bioscience Connecticut plus Jackson Laboratory) and aerospace (the UTC agree- ment that anchors Pratt & Whitney in Con- necticut with the new major research center in East Hartford) should have helped push Connecticut onto a new trajectory, but they did not find sustained support with holis- tic policies or initiatives to strengthen the whole bioscience/biomedical sector (which includes hospitals that provide critical clini- cal support) or advanced manufacturing. One idea policymakers should con- sider is allowing companies with stranded tax credits the opportunity to cash them in against the cost of major capital proj- ects. Just as in the UTC arrangement, this approach is self-funding because of the scale of new jobs and incomes it creates. And, critically, it transforms tax credits into prospective incentives that shape cor- porate planning — as it did with UTC — rather than a residual of past activity with little influence on future planning. Contrast Connecticut's approach with the growing impact of initiatives in Albany, N.Y. in nanotechnology and Cornell's new technology campus in New York City, or Mas- sachusetts's billion-dollar bioscience fund and the multi-university High Performance Computing Center in Holyoke, Mass., and the linked IT infrastructure initiative. Indeed, a striking aspect of the current situation is that Connecticut sits between two of the nation's strongest growth centers — the New York City and Boston metro areas — but is largely unable to share in that dynamic. Add to this historical perspective the current budget and tax chaos, in which Connecticut faces sizable deficits over the next two fiscal years. No business in Con- necticut can now anticipate and thus plan for its tax (or regulatory) environment. Nothing is so hostile to business as uncertainty. Connecticut it seems has become the state of uncertainty. Forecasts now show budget deficits as far as the eye can see; the conversation focuses only on trying to now minimize the damage already done with incoherent tax initiatives and where to cut spending. But there is essentially no solution to the budget crisis without economic growth. And to that there is remarkably little attention. Conventional forecasting tools rely to a significant degree on stability and continu- ity in policies. Clearly, in the current envi- ronment, it is particularly difficult to see where Connecticut's economy is headed. Perhaps the current crisis will finally force Connecticut both to develop far better mea- sures of its own performance (Connecticut is, some have said, a "data desert" because it does not regularly benchmark its own per- formance, and rarely exploits best practices other states pursue) and to build a policy process that will, in the future, frame policy in a more coherent and transparent way. Connecticut, which has a remarkable array of assets and an important loca- tional advantage, can chart a course that will restore its economic vitality and, in so doing, meet its fiscal challenges. The question is, will it? n Fred Carstensen is a professor of finance and economics and director for the Con- necticut Center for Economic Analysis at the University of Connecticut. INSIGHT Fred Carstensen 2016: A sea of navigable risks By Peter Gioia A s we navigate a sea of growing risks, 2016 could be a positive turning point. The good news is we have several strong areas for near- and long- term growth that were not visible prior to the Great Recession of 2008. Key factors c o n c e n t r a t e around manu- facturing, energy and housing, and their combined impact on consumer confidence and spending power. Manufacturing is walking on two legs Commercial aerospace is back and the popularity of the new Pure Power Pratt & Whitney engine is a game changer. There are massive orders for this product, which is assembled in Greater Hartford (80 per- cent of the engine's value comes from about 700 Connecticut subcontractors). Worldwide demand from surging middle classes for air travel will double the num- ber of jets in the sky by 2025 and lead to opportunities for Connecticut spanning a generation. The effects of this are just beginning and will grow in earnest in 2016. But, that's not all. Electric Boat is producing two attack subs per year and that will simultane- ously lead to record defense spending for our state. About 400 subcontractors sprinkled throughout Connecticut will share in this activity. Energy prices staying low Since 2014, we've all seen lower gaso- line prices putting about $700 in extra spending power in the average family's pockets. This will continue for the fore- seeable future with less demand from China, and production from Iran and the Saudis continuing to pump even at lower prices to maintain market share. But natural gas is an even bigger story. Pipeline underway from the Marcellus Shale in Pennsylvania will bring the cheapest nat- ural gas on earth into New England and Con- necticut in 2018 and 2019. This will create an abundant supply and have a positive impact on prices for both industry and consumers. Housing is back We will see a good year in housing in 2016 aided by continued low interest rates. Yes, the Federal Reserve will raise rates in 2016, but slowly and with pauses. This will keep mortgages cheap while lenders want to lend. Furthermore, as we see more jobs in Con- necticut, Millennials will move from renting and living at home to home buying. Housing is a powerful driver of economic activity. All of this will help increase consumer spending. Risks remain Unlike manufacturing, housing and energy, financial service job numbers continue to struggle. The insurance industry faces continued changes, especially in health care, while cost concerns remain significant for banks and market-related financial services. Unfortunately this has degraded job qual- ity during the recovery as more recovered jobs have been in lower-paying healthcare services, and hospitality and leisure, and fewer in very high-paying financial services. In addition, the lower-paying sectors have weak job multipliers (for every new job "x" number of other jobs are created) whereas financial service jobs have a very large multiplier effect. Exporters are feeling the impact of a higher U.S. dollar versus foreign currencies. China's economy is slowing and this will impact our trading partners who have closer ties to China as customers of their commodities. It's a catch 22 because China's slow growth and lower demand ensure a low price ceiling for oil. Europe is growing but the south of Europe remains weak. In addition, India is growing strong but Latin America is struggling along with Russia and much of Eastern Asia. We are all too aware that terror still exists as a real problem, too, and that can stall global growth. However, Connecticut's government fiscal issues remain the biggest specific challenge for our state to overcome to see vibrant, steady growth. Lawmakers must continue to adopt poli- cies that lead to sustainable and predictable spending, take care of our budget needs with- out tax increases, and find a way to roll back the most growth-inhibiting taxes. If we take care of problems we can control, like Connecticut's fiscal stability, we can weather the global storms that we cannot control and create more opportu- nity and prosperity in our state. n Peter Gioia is an economist and vice president at the Connecticut Business & Industry Association. Peter Gioia