CBIA Economist Sees Weak Growth in 2011

Prospects brighter in 2012, but only if state makes smart fiscal choices

By Peter M. Gioia

Uncertainty reigns as Connecticut’s economy enters 2011. Although our economy grew throughout 2010 and will continue to do so, growth has been glacially slow lately. A double-dip recession probably won’t materialize, but rapid growth is also quite unlikely. Here’s a closer look at what’s in store for the months ahead.

Worried Consumers

Based on analysis of CBIA business surveys and discussions with national and international economists, I see continued slow growth averaging less than 3% of GDP and Connecticut GSP (gross state product) for 2011. Yes, we will see bright spots—for example, in exports and business-to-business sales. Service and manufacturing firms tied to international activity will outperform the average company, and some may even have excellent years, but they will be outliers.

Another bright spot is that compared to 2010 (and certainly compared to 2008-09), fewer firms will fail or suffer substantial losses. Most, however, will continue to struggle, showing small year-over-year gains or flat sales. Why? Consumers are still worried. Although many are successfully deleveraging, they won’t all necessarily be spending. Many will maintain a savings cushion despite the capacity to spend, and they’ll remain disciplined rather than seek instant gratification.

Because of continued jobs weakness, even well-positioned consumers remain concerned. They see their neighbors, friends, and family members still out of work or underemployed. Joblessness may even increase above its current rate of 9.8% nationally and 9.0% statewide as some discouraged workers look to reenter the labor force.

Personal income will also influence spending, which is potentially a bit of good news. We will likely end 2010 with another year of negative personal income growth but see weak but positive growth in 2011. With low inflation, any growth above 2% (which is likely) adds to consumer spending power.

The Jobs Picture

Connecticut lost 103,000 jobs in the recession, and personal income plummeted 4% in 2009. Recent job growth in the state has been uneven. November figures showed a gain of 2,500 jobs for the month, but Connecticut has gained only 8,000 jobs net for the year.

The sectors that saw year-over-year job gains are retail trade, professional and business services, educational and health services, and leisure and hospitality. Those that lost jobs include construction, manufacturing, wholesale trade, transportation and warehousing, utilities, information, financial activities, and government. It’s telling that manufacturing and financial activities—the sectors that represent Connecticut’s base industries with the highest multiplier effects for jobs and wealth—are net job losers from 2009.

Various estimates have the state adding between 6,000 and 22,000 net new jobs in 2011. So even in the best case, nearly 80% of workers who have lost jobs will still be unemployed by 2012. Unfortunately, I don’t see the best-case scenario playing out.

CBIA surveys show weak potential job creation, with almost an equal number of firms saying they will add as will cut jobs over the next quarter. Sluggish consumer demand and a continuing credit crunch for small and midsize firms exacerbate the challenge. (About half the firms seeking credit in the third quarter said they were having difficulties obtaining what they needed.) However, because our surveys have shown productivity numbers increasing at an unsustainable rate, we will do better than the worst-case scenario and add around 10,000 jobs.

Also hindering job growth is weak business confidence and continued uncertainty regarding federal and state policy decisions that impact business return on investment. Indeed, policymakers in Washington and Hartford must make decisions that will improve the business climate and boost confidence if we are to grow our economy faster than 3% and get people back to work.

Other Indicators to Watch

Recent CBIA surveys show that about half of executives expect their firms to be profitable over the next year, about 20% expect a net loss, and 30% expect to break even. On the positive side, we continue to see firms making investments to innovate, develop new products and services, and update equipment.

In addition, indications are that inflation will be benign for 2011, with federal funds rate increases unlikely and, hopefully, added stimulus from the Federal Reserve’s effort at quantitative easing. We also expect that energy prices will remain at a level consistent for growth, although they’ll be higher than in 2009.

It’s hard envision housing going anywhere but up given that the market likely bottomed out last fall. (By comparison, the overall economy hit bottom in June 2009.) But again, the pace of recovery remains dismally weak, and housing is tied to job creation, so don’t look for a dramatic rebound anytime soon.

International conditions bear close watching. Military tensions in many parts of the world, ongoing volatility in several energy-producing regions, and financial crises—such as the sovereign debt problem throughout much of Europe—could negatively affect the U.S. economy. On the bright side, markets in Asia, Latin America, and parts of Europe appear stronger than in the U.S. Exports, which account for a substantial part of the state and national economies, are already showing solid recovery.

One Variable We Can Control

Daunting fiscal challenges at the federal, state, and municipal levels continue to be a drag on business investment and economic growth. Connecticut must solve its fiscal crisis, but in a way that encourages business investment and job creation. How? Focus on reducing the size and cost of state government while minimizing revenue-enhancement measures. That way, when conditions truly start to improve in 2012 (as many economists predict) and companies begin deciding where to invest and add jobs, we won’t lose that investment or those jobs to other states or countries with more favorable business conditions. In this sense, Connecticut controls its own economic destiny. We need to make the right choices.

Peter Gioia is vice president and economist at CBIA. He can be reached at pete.gioia@cbia.com.

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