Governor’s economic report shows “Connecticut’s Comeback” might take a while

Gov. Ned Lamont labeled his proposed budget “Connecticut’s Comeback” and that may be true in regard to Connecticut surviving the fiscal impact of the pandemic better than expected, but, according to the governor’s economic report, Connecticut’s economy will continue to underperform compared to the rest of the country in the future.

Leading into 2020, Connecticut’s economic growth, job creation and wage growth were some of the slowest in the country. The state had not recovered from the 2008 recession in terms of jobs or gross domestic product, whereas neighbors like Massachusetts saw massive gains.

And Connecticut’s lagging economic position doesn’t appear to be changing anytime soon.

According to the governor’s economic report, “Overall, the state’s economic output will remain below levels achieved in 2007.”

Although the report notes Connecticut’s economy should recover from the pandemic by the end of 2021, the state’s economy will lag behind national growth rates.

The U.S. economy is projected to grow 4.1 percent in 2022, 3 percent in 2023 and then slow down to 2.5 percent in 2024. Comparatively, Connecticut’s economy is projected to grow 3.9 percent, 2.3 percent and then 1.5 percent respectively, according to the report.

While the state’s economy is projected to fully recover from the pandemic by the end of 2021, the same cannot be said of jobs lost during the COVID-19 shutdown, with the economic report forecasting that job growth will slow to 1.7 percent in 2023 and then decline by .2 percent in 2024.

“The closest level to the pre-pandemic high for employment is forecasted to be reached in the third quarter of 2022,” the report says. “This level is projected to be 0.7 percent below the previous peak which equates to an estimated 12,400 jobs short of full recovery from the pandemic.” 

Connecticut’s unemployment rate will also remain higher than pre-pandemic, although in line with the national unemployment rate. The report noted that federal stimulus money kept Connecticut’s wages from falling into the negative over the course of 2020.

But economists believe that even these lackluster economic assumptions may be too rosy, given Connecticut’s history.

“The governor’s assumptions on the economy are overly optimistic,” said Donald Klepper-Smith, chief economist for DataCore Partners, LLC and former economic advisor to Gov. M. Jodi Rell.

“If we look at the long-term trend, Connecticut’s economy has basically flat-lined over the last ten years, growing only 1.1 percent over the last ten years whereas the national economy is up 26 percent. So, to look at the growth rate they have on GDP and jobs is really overly optimistic.”

“I think they need to recut and recast these numbers in a more realistic light,” Smith said. “If you’re assuming 2024 for job recovery, that would imply some real significant job growth, something in area of 2 percent per year.”

Connecticut’s last two months of employment data showed the state was losing jobs again after several months of gains following the pandemic lockdown. Connecticut lost 6,400 jobs over the course of November and December, according to the Connecticut Department of Labor.

University of Connecticut Professor of Finance and Director of the Connecticut Center for Economic Analysis Dr. Fred Carstensen estimates recovery will likely take “9-10 years.”

“Real annual growth the last four years before the pandemic was .6 percent,” Carstensen said. “Connecticut was 6 percent below its previous peak in January of 2020. There’s nothing yet on the table likely to change that trajectory.”

Carstensen added that “aggressive initiatives” could speed up the pace of economic recovery, including incentivizing information technology data centers and higher education collaboration with biotechnology and advanced manufacturing companies.

Furthermore, Carstensen says Connecticut “foregoes perhaps $1 billion annually in federal dollars.”

The Connecticut Center for Economic Analysis released a report in October of 2020, saying Connecticut’s economic recovery could take upwards of 10 years and would be “long, arduous and uneven.”

Part of those “optimistic” assumptions could be related to better-than-projected revenues flowing into the state from the income tax and estimates and finals.

The resurgence of Wall Street during the continued pandemic has led to Connecticut – which relies heavily on the financial industry for tax revenue – seeing a smaller budget deficit than expected at a time when many remain out of work and much of the hospitality industry is still operating under restrictions.

Republican leaders, in their response to the governor’s budget proposal, also appeared to doubt assumptions that Connecticut’s economy would grow substantially enough to get Connecticut back on track.

“What we’ve seen in this budget is a 25 percent decrease over all our revenues throughout this pandemic,” said House Republican Leader Vincent Candelora, R-North Branford. “While that 25 percent reduction has been acknowledged by governor, it doesn’t really peel back the true story of how Main Street has been devastated by this pandemic — our restaurants and hospitality industry — and, at the same time, we’ve seen record gains on Wall Street.”  

The governor’s budget proposal relies largely on either receiving more federal relief or tapping the state’s rainy day fund to close a $2.5 billion deficit.

“If the economy doesn’t turn around and — let’s be mindful — be better than where we were before the pandemic, and if we don’t get the federal money, then the only thing you’re left with is raiding the rainy day fund,” Senate Republican Leader Kevin Kelly said.

Even if the governor’s economic assumptions are correct, the out-year report predicts the state will face another $3.1 billion deficit in the 2024 – 2025 biennium.

“Given the fact that we have a high-cost environment, the fact that we’re an out-migration state, given the fact that the state’s fiscal situation can be labeled tenuous, I think the long and short of it is the assumptions being used here should be reworked and don’t reflect reality as I understand it.” Klepper-Smith said.

“We can shape our own future; we can change our trajectory,” Carstensen said. “But to date there is little focus or discussion of how we will do that. Has there been a single legislative hearing on Connecticut’s economic performance?”

“Complacency seems to be the order of the day,” Carstensen said.