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6 | HARTFORD BUSINESS JOURNAL • DECEMBER 26, 2017 ECONOMIC FORECAST Connecticut's economy struggles to recover By Fred Carstensen, Director of the Connecticut Center for Economic Analysis; Professor of Finance and Economics at UConn's School of Business D uring the first quarter of 2017, Connecticut's economy, as measured by real output or gross state product (GSP), contracted below where it was in 2004. After seven years of contraction from 2008 to 2014, the economy managed a modest 2 per- cent gain in 2015, only to retreat to essentially zero growth in 2016 and a sharp decline in early 2017. Growth came back in the second quarter of 2017 — a meager 1.4 percent on an annualized basis — but the sharp job losses in October and larger losses since June (Con- necticut shed 12,200 jobs from June to October) indicate that for all of 2017, Connecti- cut's economy will once again lose ground. The Connecticut Center for Economic Analysis' current projections do not see Connecticut reaching its previous high of economic growth (in 2007) until 2021 at the earliest; it may take even longer. The numbers show that while many people consider the Great Recession to have lasted only two years, Connecticut's economic malaise lasted much longer. What was so deceptive was the persistent gain in jobs. Starting in Feb. 2010, Connecticut consis- tently added jobs; for 73 consecutive months, employment was higher year over year. The private sector has recovered about 93 percent of jobs lost during the Great Re- cession, but the public sector (which includes Native American casino and hotel jobs) continues to contract, now down almost 25,000 jobs from its high of 255,600. Public-sector employment will almost certainly continue to decline, driven by the continuing state fiscal crisis (fiscal year 2018 is already in deficit and forcing rescis- sions) and increasing out-of-state competition for the casinos. The irony is that, inclusive of out-of-state employment, Connecticut residents now enjoy near record levels of employment (1,820,000 residents have jobs). This con- tinues a long trend of Connecticut residents finding more jobs outside Connecticut; since 2004, the number of employed, whether in Connecticut or elsewhere, has grown 135,000. Moreover, out-of-state employment of Connecticut residents has been more resilient, suffering fewer job losses than in-state employment. Income tax revenues confirm this pattern because employees pay income tax first to the state in which they work. The combination of low-quality jobs in Connecticut and increasing numbers of Connecticut residents working out of state means income tax collections in the state have been stagnant, even with increased rates. But because people typically do most of their spending near where they live, Connecticut sales tax revenue has grown strongly, abetted by a robust tourism industry. The danger is that those working out of state will tire of the commute and choose to relocate their residence closer to where they work. Connecticut's population has been essentially stagnant; this dynamic could result in a shrinking population. There are some rays of hope. The United Technologies Corp. and Sikorsky agree- ments, in which both companies are receiving millions of dollars in tax and other incentives from the state to grow jobs here, have anchored major employers and thus thousands of jobs in Connecticut for a generation. The newly adopted state budget, thankfully, offers businesses with stranded tax credits the opportunity to use them to fund major capital projects that will potentially create new facilities supporting thousands of new jobs. The state has also made posi- tive changes to its self-destructive hospital tax. The Jackson Laboratory genomic research center in Farmington is years ahead of its promised growth; partnered with Yale New Haven, UConn's School of Medicine and, hopefully, a revitalized hospital sector, Jackson Lab has the potential to drive growth of a truly powerful biomedical cluster. The newly launched InsurTech Hartford incubator may also deliver real benefits, though the weakness in and inattention to the state's IT infrastructure will likely be a major barrier to full success. And Yale University will likely continue to make a significant contribution with its broadly successful efforts with spinoffs (more than 40 companies and over $1 billion in investments). Finally, the Department of Defense budget Congress adopted, if funded, would bring significant new orders and thus jobs to Connecticut's defense industry. The greatest challenge for Connecticut is both to adopt policies and initiatives that will restore economic growth and to implement those policies and initiatives aggres- sively. To understand what those might be, Connecticut ought to draw consciously on best practices in other states and embrace approaches that have proven successful elsewhere. Absent strong state leadership, it is difficult to envision how Connecticut will restore its economic vitality. Workforce development must be top priority in 2018 By Pete Gioia, Vice President and Economist, Connecticut Business & Industry Association C onnecticut opens 2018 with big opportunities and challenges. The General Assembly ended a long 2017 legisla- tive session in October with a rare achievement: a two-year budget forged through a bipartisan effort and approved by the vast majority of both parties. The budget contains a spending cap, borrowing cap, and other reforms designed to help put our state on a path to fiscal stability, although the current budget is showing a projected deficit. When the 2018 session begins in February, priority No. 1 at the Capitol must be jobs — fostering an environment that encourages employers to create them, train for them, and fill them. It's important to continue the bipartisanship we saw during the recent budget discussions and focus that energy on building the state's workforce. Through October, Connecticut added just 1,400 jobs year over year. We lost 12,200 jobs from June to October and the state's labor force continues to shrink. We must reverse these trends by growing jobs and increasing the pool of available workers. On the positive side, we expect a robust year for our mainstay defense contractors and their Connecticut suppliers. However, workforce challenges remain plentiful. There are thousands of good-paying jobs going unfilled at Connecticut's manufac- turers — both large and small — mainly because of an aging and retiring workforce and the lack of a sufficient number of skilled applicants. We need new policy strategies to fill those jobs, which will create economic activity and new taxpayers. To do that, workforce development must be priority No. 1 in 2018. This requires a coordinated approach that expands job incentives for companies and reallocates certain educational resources to create more science, technology, engineering and mathematics (STEM) skilled workers from technical high schools, community colleges, and universities. A greater focus on internships and apprentice- ships also must be part of the solution. We must encourage students of all ages to explore STEM careers such as jobs in manufacturing and engineering. Those efforts also must include parents, teachers and school guidance counselors. We need industry leaders to partner with educators and set up clear paths for those looking to further their education while working full time. Small, fragmented programs will not solve our workforce challenges. A clear, forward-looking statewide strategy will. This should include educators, policymakers, labor officials and industry leaders. We also need reforms that create opportunities for formerly incarcerated individ- uals to re-enter the workforce with education and training that will provide access to careers in areas like manufacturing, transportation and health services. Despite our workforce challenges, positives from previous forecasts remain and continue to improve: Manufacturing is doing great in defense, aerospace and other areas; financial services continues a modest rebound; risk of recession is lowest in over 20 years; credit availability is excellent; the Fed still supports expansion; housing continues a modest recovery; exports are doing well; stock market performance is outstanding. When it comes to national and international challenges, there are still risks given active terror organizations and tensions with North Korea, as well as the conflict between Russia and Ukraine, and Saudi Arabia and Iran concerns. There are also uncertainties with federal tax reform; lower taxes on corporations and pass-through entities will help but a cap on personal income tax deductions could hurt a high-tax state like Connecticut. With so much out of our control, we as a state must continue to work on what we can control. That means making policy choices that focus on economic growth and workforce development.