Despite a soft patch, the U.S. economy is on the rise, uncertainty is easing, and fiscal policy is becoming less of a drag.

“Our optimism has been tested. The five-year recovery feels more like 30, but the U.S. economy is improving after a long, abnormal winter," said Moody’s Analytics senior economist Ryan Sweet, addressing 230 business leaders at CBIA’s 2014 Connecticut Economic Update on May 9.

Forecasting U.S. GDP increases of 3% in 2014 and 4% in 2015, Sweet [pictured above] says private industry will do “fairly well” this year and “exceptionally well in 2015 and 2016.”

"The bad news is that state government continues to be a significant weight on the pace of Connecticut's economic recovery," said Sweet, speaking two days after state lawmakers completed a 2014 legislative session marked by a lack of focus on economic competitiveness.

Economic uncertainty

He said that was in contrast with the national outlook, where he expects U.S. fiscal policy should "be less of a drag" going forward.

"A lot of economic uncertainty remains, but pent up demand should help drive growth," Sweet said.

Like much of the Northeast, Connecticut's economy was impacted by weather-related disruptions in factory production and pullback in consumer spending as utility bills skyrocketed and unemployment benefits expired.

The housing market, critical to the state's economy, also saw recent weakening--particularly in new construction starts--driven by limited inventory, few buildable lots, and a shortage of skilled construction and licensed trades people.

Exports

In addition, Europe’s faltering economy has affected Connecticut exporters.

“With the exception of aerospace, Connecticut exports to the Euro zone have been flat,” said Sweet, but added that recent improvements in the global economy should boost manufacturing and exports in the Northeast.

Over the next two-three years, he said, Connecticut will benefit from:

  • Pent-up demand for equipment and capital investments
  • A pickup in business research and development
  •  Banks opening up the credit spigot
  • Wage growth
  • A lift in consumer spending to support industries that have been stagnant, including retail and leisure/hospitality

Coupon factor

Joseph Kelley, president of Stop and Shop New England, also touched on consumer spending patterns in his keynote address at the May 9 conference, noting that the weak economy has put coupon usage “through the roof”—at its highest level in 25 years.

Kelley too, however, is optimistic about the near future.

With 93 stores throughout the state, Stop & Shop—one of the state’s largest employers—generated over $39 million in sales and use taxes in Connecticut in 2013, paid over $24 million in real estate taxes and almost $5 million in personal property taxes in the state, and made nearly $1 billion in capital investments in Connecticut over the last decade.

Competitiveness

In order to keep businesses growing here, CBIA’s vice president of government affairs, Bonnie Stewart, told the audience, we need to reduce business costs, improve education and transportation infrastructure, and bring Connecticut “up that competitiveness ladder.”

Positive measures adopted this past legislative session, she said, included efforts to simplify the tax code; elimination of double taxation (estate and gift taxes); the apprenticeship tax credit; workers compensation reform that brings surging medical costs under control; the creation of a new port authority; and a five-year plan to improve the state’s transportation infrastructure.

"Nonetheless, we’ve got a huge problem when it comes to the state budget,” she said. “We’ve seen our revenues fall and there’s a huge deficit projected for two years out.

"All the gubernatorial candidates are saying they won’t raise taxes if they get elected, but that means they have to get their spending under control.

"Traditionally, cutting spending is something the legislature, to put it nicely, has a great deal of trouble with."