Is the nation’s economy headed into another recession?

What impact will Connecticut’s new budget—or lack of one—have on business investment and job growth in the state?

2016economicupdate
University of Hartford economist Susan Coleman and CohnReznick's John Turgeon.

Where are oil prices and interest rates headed, and what will that mean for domestic and global markets?

Business, economics, and public policy experts tackled these and other questions at the Connecticut Economic Update on April 29.

Sponsored by Chase and hosted by CBIA at the Aqua Turf Club in Plantsville, the conference drew more than 200 executives from every corner of the state.

Getting to the Ninth Inning

“Yes, we’ve had a prolonged slowdown, but I don’t see a recession on the horizon,” said Chris Ball, professor of international economics at Quinnipiac University.

“It’s more a question of when we get back to normalcy. Nothing in our economy is going to be driving up inflation or wage growth in the next few months.”

Global influences on the economy, he said, include whether the U.K. withdraws from the European Union.

“Europe is just now back to 2008 levels of production, so they’re still struggling and haven’t gotten bad loans off their books. There’s a hold on growth in Europe.

"If the U.K. exits the E.U. and freezes labor mobility over there, that will cause problems. Money could be pulled from emerging markets, with no real growth in the coming years.”

China’s move away from manufacturing and export-driven growth, he added, “means long-term we’re going to be able to sell consumer goods to China.”

Ball and Jim Glassman, head economist at Chase Commercial Banking, disagreed with the popular view that the economy would benefit from higher oil prices—especially not in Connecticut, they said, where the low price of oil is a clear benefit to consumers.

“It’s uneven how it plays out,” said Glassman, “but on balance, at the end of the day, we as a country benefit from lower oil prices.

"If you’re Texas or North Dakota it’s an issue; if you’re an oil-producing country, it’s an issue. But to say our markets suffer because of low oil prices is simply untrue.”

I don’t see a recession on the horizon.
— Chris Ball, Quinnipiac University
Ball doesn’t expect oil prices to change more than 20% in the next year.

When asked whether he thinks the country is moving into another recession, Glassman also said no.

“People talk about it when the market stumbles, but concerns about a recession are premature. The talk about recession is a way of talking about the equity market.

“Times like this, when there are a lot of shocks hitting you, you want to step back and see what’s going on in the broader economy.

"The structural federal deficit is rising, and healthcare is driving it.

“But this economy has been getting back on its feet for the last six or seven years. Recoveries don’t last more than seven to nine years, so it’s about getting to the ninth inning.

"We’re still in the seventh inning of expansion, and we’ve got a lot more upside coming.

Taking the Temperature

“Labor market indicators are good,” said Glassman. “I’ve never seen layoffs this low.

"That’s a very good, very sensitive indicator of what’s going on in the economy, whereas GDP is full of seasonal disruptions and is a poor measure of what’s going on in economy.

“Productivity metrics come from our estimates of GDP, and it may be that we’re not really capturing a lot of activity in our GDP statistics, like what’s going on with Amazon or the gig economy.

"We see innovation everywhere, but we don’t always see it in our numbers. Don’t be writing obituaries about our productivity, because these things develop slowly.

"You have to get people in place first, before you see productivity go up. You can’t see an app until you have a person develop the app.”

We’re still in the seventh inning of expansion, and we’ve got a lot more upside coming.
— Jim Glassman, Chase Commercial Banking
Regarding today’s near-zero interest rates, he observed, “Where we are now is not normal, so I expect the Fed will raise rates.”

Ryan Sweet, director of real-time economics at Moody’s Analytics, agreed that the probability of a recession in the very near future is very low.

“2017-2018 is when we should be talking about the prospect of a recession," he said.

"The financial markets—stocks and equity—and our economy are two different things and can send two different messages.”

Sweet disagreed with Glassman and Ball, however, about the benefits of cheap oil.

“We should be rooting for high oil prices for better business investment,” he said.

“I think consumers can stomach greater gas prices.”

He added that higher inflation will lead to pay increases.

“There is a causal relationship between higher inflation and higher wage growth,” he said, adding that the jobs recovered after the recession “aren’t the same wage and skill levels of those that were lost.”

Ball noted that though a recent reshoring of jobs from China has been a positive trend for U.S. employment, “there’s also more innovation.”

Glassman agreed.

“The fundamental challenge for Americans for a while was thinking that the recession killed all the jobs," he said.

"But actually, sweeping innovation is displacing some of that work, so a lot of people with mid-level skills are losing ground. Routine work is getting displaced.”

“It’s been a historical problem,” said Ball, “but what’s a little more concerning is that there’s an education gap that continues to grow, with a less-educated workforce having a hard time finding quality jobs.”

When asked about key takeaways on our economic situation, Glassman offered this: “Keep your eye on what’s going on with the layoff pace. There’s a lot of angst, a chill whenever you hear people talk about recession.

"I, as an economist, am encouraged by the angst because it shows we’re still recovering. I think we’re at a sweet spot, still.

"There is great moderation we’ve been seeing in the past few decades, and moderate growth is great.”

“I’m optimistic as well,” said Ball. “Though the world economy is not growing as robustly, it’s growing at 6.5%. There are challenges, yes, but we’ll be fine.”

“Don’t stress,” echoed Sweet. “We’re going to be fine. Watch the job market. As the job market goes, so goes the economy.”

‘This Is a Story About Jobs’

On the subject of the labor market, conference keynote speaker Paul Quick, senior vice president and general manager of Connecticut operations for Frontier Communications, said his company is “investing in speed, fiber, and gigs."

Watch the job market. As the job market goes, so goes the economy.
— Ryan Sweet, Moody's Analytics
“This is a story about jobs,” he said.

"Job growth that makes Connecticut more competitive and more successful.

"We’ve hired 600 new employees and created 300 additional jobs that weren’t here before we came. We expect to hire 200 more over the next two years.”

He noted, however, that 50% of Frontier’s engineers are retirement-eligible and that the company is working with New Haven Works, Western Connecticut State University, Sacred Heart, Southern Connecticut State University, Gateway Community College, and others—and hopes to partner with the state’s technical high schools—to create pathways for new employees coming into the business.

“Making a strong Connecticut is our business,” he said.

Asked how the state’s fiscal challenges are impacting the telecommunications industry, Quick said, “The state’s economic environment impacts companies, and if jobs leave the state, we will feel it.”

Connecticut’s Business Investment Climate

In a panel on business investment in Connecticut, CBIA’s senior vice president of public policy, Brian Flaherty, called the climate at the State Capitol “hazy, hot, and humid.”

He said, “There were three distinct plans on the table as of yesterday—not budgets, but plans—and a $900 million gap between revenues and expenditures that needs to be solved.

“The governor stressed that government needs to change what it does and how it does it, focusing more on sustainable solutions as opposed to one-time fixes.”

Flaherty pointed out that because the legislature is built on a two-year election cycle instead of an economic cycle, “it results in a lot of short-term thinking. What legislators need to do—and the governor has been a very strong voice on this—is to build stability.”

Susan Coleman, professor of finance at the University of Hartford's Barney School of Business, also decried the cycle of deficits and tax increases.

Businesses don’t think in two-year increments, which is a mismatch with legislators—who do think in two-year increments.
— Susan Coleman, University of Hartford
“Anything that increases expenses reduces your cash flow," she said.

"What we have now are a lot of proposals that are taxes—even though they aren’t being called that. This raises the risks to future cash flows and discourages major business investment.

"This environment is very detrimental, because businesses don’t think in two-year increments, which is a mismatch with legislators—who do think in two-year increments.”

On the subject of proposed minimum wage hikes and added healthcare mandates, Coleman noted, “One of the things you have to keep in mind after one of the ugliest legislative sessions, which last year reached a new high-water level in terms of vitriol against business and deeply offended many people in the business community—is the rhetoric that’s been building over the last few years has accelerated Connecticut’s reputation as a bad business environment.

“Mandates add to the perception that this is a hostile place to do business.  Kiplinger. CNBC. Bloomberg. Rich States, Poor States.

"All of these studies put Connecticut at the bottom of the heap of business-friendly, business-conducive environments. It’s cumulative, and it reinforces the image that this is a difficult place to do business.

“By nature,” said Coleman, “people who start and grow businesses are optimistic people. And right now, they are feeling beaten down. We’re seeing families, individuals, and businesses all leaving the state of Connecticut.”

John Turgeon, partner at the accounting firm CohnReznick, agreed.

“It’s really been a changing attitude,” he said.

“We’ve kicked the can down the road last 10 years, and our clients are feeling frustration. They see a state that keeps trying to tax its way out of its problems.”

Turgeon says a growing number of business owners are considering leaving the state.

“We’re getting the question you never want to hear from a client: ‘Should I be here?'" he noted.

Despite its high quality of life and educational assets, Connecticut’s growing debt and unfunded liabilities, he said, are crowding out the benefits our state has to offer.

Our clients are feeling frustration. They see a state that keeps trying to tax its way out of its problems.
— John Turgeon, CohnReznick
“We’re at a point where we need to examine and figure out which services are a priority, which ones deliver," he said.

"The statutory spending cap over the years has been loosened to the point that you end up with a cap that applies to very little and allows spending to get out of control, because legislators pass laws saying things like, 'This spending cap notwithstanding…'”

The cap, said Turgeon, has never been defined.

“That would be the most useful thing for this General Assembly to do before closing on Wednesday.”

Flaherty recommended looking closely at unfunded state pension liabilities, prison reform, and reforms in long-term healthcare specifically as areas that can deliver significant long-term savings.

Our current long-term healthcare and prison systems, CBIA economist Pete Gioia noted, carry enormous—and unnecessary costs.

“These are some of the areas of greatest fiscal waste, with $650 million a year spent on sending people to nursing homes when they could get high-quality, lower-cost care at home," he said.

“And we’re locking too many people up instead of getting them back into the community with the right skills, where they can be productive citizens and taxpayers.

“But at least there have been some actions to turn the ship around. At least there’s been a lot more discussion at the Capitol.”