Hartford Business Journal

www.HartfordBusiness.com decemBer 26,2016 • Hartford Business Journal 13 BOOK OF LISTS & ECONOMIC FORECAST 2016-2017 Economic Forecast CT's economic malaise likely to continue By Fred Carstensen UConn economist A s of Nov. 2017, total employment in Connecticut is below the level of jobs that existed in Feb. 1989. That equates to 27 years without any perma- nent job growth in the state. Even worse, real output (state GDP) is nearly $15 billion below its previous peak in fall 2007 — the nearly 70 percent loss of nondurable manufacturing, once the state's third largest sec- tor, accounts for essentially all of that shortfall. And after an anemic recov- ery in jobs from 2010 to 2016, the state has now lost jobs five of the last six months (as of Dec. 15), even as the nation has continued to add jobs. Finally, since 2007, only Nevada and Illinois have seen less growth in personal income. Little wonder then that Connecti- cut is in fiscal crisis resulting from weak tax revenues. Given the numbers, why is anyone surprised? History often casts a long shadow. Just as Connecticut dug a deep hole for itself by setting aside far too little money to pay for its retirement and health insur- ance commitments, the state failed to respond to weak job creation after the sharp recession of the early 1990s — a weakness the continuing strong growth in real output and the rapid growth in jobs driven by the tribal casinos masked — or to develop and implement a coherent economic-development vision. Nor did Hartford do anything to improve its budget process, or to begin to build better data to frame policy analysis. The state drifted. Now, in the face of a mounting fiscal crisis, working without any dynamic analysis, the Office of Policy and Manage- ment and the legislature are making cuts in services and programs that will almost certainly weaken the state's economy fur- ther without stabilizing the budget. The "savings" in some cases actually reduce future revenue even more. And essentially nothing has been put on the table that is likely to restore Connecticut's economic vitality or build aggressively on the strengths created in bioscience or sustained in aerospace. Indeed, the state just ignored a project whose economic potential is greater than what the state will get in return for provid- ing $400 million in incentives to United Technologies Corp. and $220 million in incentives to Sikorsky, to keep and add thousands of jobs in the state. That ignored project includes a plan by developers to redevelop Stanley Black & Decker's legacy manufacturing properties in New Britain into a state-of-the-art technology park that could include $500 million in capital investment from outside investors. It's a project that would have put Connecticut on the national competitive map, but hasn't received enough support from the state. There is thus little to argue that private- sector growth will offset the contracting public sector. Indeed, it seems very likely that Connecticut's economy will contin- ue to struggle and the budget crisis will almost certainly continue for years absent a radically changed approach. Connecticut's economic malaise and poor growth prospects clearly flow from conditions specific to Connecticut; both New York and Massachusetts are grow- ing strongly, whether measured in job creation or output. Compared to 2007 — before the finan- cial tsunami — Massachusetts has added 260,000 jobs and seen real output grow more than 8.5 percent; New York has added a half-million jobs and real output is up almost 8 percent. Neither state is so dramatically different in taxes, regu- lations or "business environment" that these usual explanations for Connecti- cut's malaise suffice. And then add in California, heav- ily taxed, regulated and unionized, yet adding more jobs — quality jobs — than Texas and Florida combined. The reality is that Connecticut appears to be a singu- larity, economically adrift, disconnected from the drivers of job creation and eco- nomic growth regionally or nationally. If true, there is likely to be little eco- nomic improvement in its performance in the near term. n INSIGHT Fred Carstensen Big challenges, yet hopeful outlook for 2017 By Peter Gioia Vice President and Economist at the Connecticut Business and Industry Association C onnecticut has great economic potential. Our base of industry in manu- facturing, financial services and biosci- ence is one any state wishes it had. Still, concerns linger. Connecticut con- tinues to bear the brunt of policy decisions and actions that discourage invest- ment, resulting in some Connecti- cut firms invest- ing and creating jobs outside of the Nutmeg State. We should remain hopeful, however, as there are signs that we can fix this: • The risk of recession, according to Moody's, is at 10 percent, a historically low number for the state. • Consumers have more money to spend because of cheap gas at below $50 a barrel and moderate income hikes. • Housing starts and sales are increas- ing while prices remain moderate, and interest rates will remain low, despite two three-quarter point Fed rate hikes. • In addition, credit availability remains strong, and strong efforts are being made to create and fill jobs, espe- cially in manufacturing. Locally, the three powerhouses of Pratt & Whitney, Electric Boat and Sikorsky will stimulate activity, not only in their firms, but with their mas- sive supply chain of 1,000-plus Con- necticut subcontractors that benefit from their success. Other good news? Although slow, financial-services jobs are coming back and the impact of firms ramping up oper- ations in New York due to Brexit may ben- efit Connecticut. All of this bodes well for us. Looking into the new year, we should be mindful of challenges that are cloud- ing what would otherwise be a more posi- tive outlook on Connecticut's economy in the medium- and long-term future. First, the state's November labor report recorded a small increase of 2,100 jobs, but big losses in October (-5,800) and September (-6,600) are more trou- bling. Connecticut has only recovered 72 percent of jobs lost during the recession, the worst in New England, and the state's unemployment rate is 4.7 percent. Year over year, Connecticut has created only 1,400 net new jobs. Secondly, a recent quarterly credit and economic survey of state businesses revealed ongoing concerns from business leaders about the state economy's modest growth, which is at its weakest since the Great Recession. Third, only 26 percent of those sur- veyed expect conditions to improve for their company; more troubling is the additional 24 percent that expect condi- tions to worsen. When asked if they plan to hire, only 19 percent expect to add workers and 23 percent expect to cut jobs. Credit conditions have marginally weakened as well. These challenges can be addressed, and now that the election is over, the incoming legislature's "to-do" list is becoming clearer. Given that thousands of jobs are going unfilled, as Baby Boomers retire, we need to spur the growth of our homegrown talent pool from state high schools and universities. Even non-defense, non- aerospace manufacturers are clamoring for hundreds of workers. This legislative session, lawmakers must drive policies that encourage firms to train employees and students alike in the newest skills. Another short-term hurdle is the bil- lion-dollar deficit expected when legisla- tors begin working on the biennial budget in January. Gov. Dannel P. Malloy has promised to address this without adding new taxes. It will be a daunting challenge, but Connect- icut cannot afford more tax increases. Given the even split between Republicans and Democrats in the state Senate, and the narrow Democratic majority in the House, it is imperative that the incoming legislature put partisanship aside to work with Malloy on a solution. Nationally, the Trump administration will be a mix for business but on balance, I expect it to be somewhat positive. His position on trade, immigration, and overseas corporate profits may hurt, but any rollback of anti-business regula- tion and renewed focus on jobs, as well as transportation and manufacturing, will help the economy. Overall, I expect Connecticut will fin- ish 2017 in more positive economic terri- tory than today. The economy will see a slow start in the first two quarters and likely gain steam in the latter half, given federal impacts that will accelerate jobs and confidence. What happens with Connecticut's state budget remains to be seen, but resolving forecasted deficits without rais- ing taxes will be a very positive achieve- ment for the state and its residents. Ultimately, Connecticut will marginally benefit from stronger U.S. growth and should be slightly impacted by slow global growth. The real issue for the state is to get its own fiscal house in order and avoid more anti-business mandates. If we can do that much, the state will sub- stantially improve business confidence here, leading to more investment and job growth. There's a lot to watch. n Peter Gioia

• Cover