What are the prospects for economic recovery in Connecticut? According to Susan Coleman, professor of finance at the University of Hartford’s Barney School of Business, there is good news and “not-so-good news.”

Speaking Thursday before more than 200 business leaders at CBIA’s The Connecticut Economy conference in Rocky Hill, Coleman said the state is making progress toward recovery, but that it’s a “somewhat shaky recovery.”

“There are mixed signals about the recovery of the economy at both the state and national levels,” said Coleman, citing uncertainty over the European debt crisis and problems addressing our own national debt.

Those two issues have “muddied the waters as we come out of this severe recession,” she said.

A Qualified Upside

“There is a lot of good news,” said Coleman. “First of all, we are no longer in a recession. Both gross state product [GSP] and national GDP growth rates turned positive in 2010.”

In 2010, Connecticut GSP grew by 3.1% and U.S. GDP by 2.6%. Although encouraging, those numbers suggest a recovery considerably weaker than optimal.

“At the national level, generally we’d like to see growth rates coming out of a recession of at least 3% to 4% to have a nice, healthy recovery…So it’s a weak recovery at best.”

Coleman identified Connecticut’s strong durable goods manufacturing sector, positive export numbers, and the rebound of the state’s finance and insurance industries as other positives, as well as the fact that the state has added jobs.

“From July 2010 through July 2011, we added 8,700 jobs in Connecticut,” she said, citing manufacturing, professional and business services, and health services as sectors that have seen job growth. “The bad news, of course, is that we’d like to see…more jobs.”

Another positive sign, said Coleman, is that Connecticut companies have used the time since the recession ended to pay down debt, resulting in stronger earnings and balance sheets.

She noted that households have also made progress in paying down debt, remarking that “sanity has taken over.”

The Downside: Slow Growth into 2012

Coleman identified several factors hindering a more robust recovery in Connecticut:

  • Demographically, Connecticut is an old state: the median age is 40 (compared to 37.2 nationally), and the population of key working-age adults (18-44) is shrinking.
  • Connecticut is not seen as an attractive state for young people to live and work.
  • The state’s unemployment rate remains high at 9.1%—the second highest in New England.
  • The gap between rich and poor is growing.
  • Connecticut’s housing market remains weak
  • High levels of state and municipal debt, including massive unfunded liabilities for state employee pension and post-retirement healthcare benefits, will slow down our economic recovery.
  • Connecticut continues to be seen as unfriendly to business.

“Connecticut has many strengths,” says Coleman, “but continued weakness in the housing and local markets serve as a drag on the economy.

"Consumer and business confidence are deteriorating, and these factors, combined with global and national economic issues, point the way to slower growth for the balance of 2011 and into 2012.”

A Recipe for Success

Can Connecticut overcome its barriers to economic recovery? Coleman believes the state has the fundamental ingredients for economic, business, and entrepreneurial success.

“There are really three ingredients you need for success: human capital [an educated, experienced workforce], social capital [a rich network for gaining access to resources and information], and financial capital,” says Coleman.

“And the good news for Connecticut is that we have very high levels of all three.”

Add several policy initiatives to those basic ingredients, and Connecticut could be well on its way to economic recovery. Coleman recommends that the state do the following:

  • Create an economic development strategy that includes a role for new, small, and midsize firms.
  • Align tax, regulatory, and spending policies with economic development needs and objectives.
  • Tie workforce development initiatives to needed skill areas in advanced manufacturing and other industries.
  • Target key industries with growth potential and provide incentives for entrepreneurship.

Finally, Coleman suggests that the state undergo an attitude adjustment.

“We’ve got to [move] away from ‘business is the problem’ and ‘no you can’t’ to ‘business is a key element of the solution’ and ‘yes you can’ and ‘let me help you.’”

The National Outlook

In a presentation focusing on U.S. and global economic woes, Edward Guay, principal at Wintonbury Risk Management in Bloomfield, argued that the U.S. economy is not recovering nearly as quickly as it should.

He cited the slow rate of growth in our labor force (0.2% per year, not accounting for immigration), eroding productivity, and a recovery in our labor market that he described as quite small. (Unemployment has gone from 10% to 9%.)

Government Policies the Culprit

Why such an anemic recovery? Guay pointed the finger directly at what he believes are misguided economic and monetary policies.

“For a severe recession with a massive correction in inventory, capital spending, and construction,” said Guay, “this has been a dismal recovery of the economy, and policy is substantially to blame for that.”

In particular, he decried the Fed’s keeping of real interest rates too low for too long (erroneously believing that inflation was under control) and the government’s over-emphasis on trying to stimulate consumer demand as a strategy for economic recovery.

Guay argued that the latter policy can’t work in a country that is not competitive in the world, because more consumer demand will simply be directed toward cheaper, foreign goods.

“If a country is noncompetitive in the world, stimulating consumer demand stimulates import penetration, not domestic production and employment,” said Guay. “U.S. stimulus programs have helped Chinese workers more than U.S. workers.”

In addition, Guay argued that the federal government’s overregulation of the private sector has severely retarded economic growth, job creation, and the country’s competitiveness.

“We are also further damaging our competitiveness with mindless regulation that does not honestly apply cost-benefit analysis,” said Guay, adding that “the list of job-destroying regulatory decrees” from the federal government is “growing longer nearly every week.”

What Can Be Done?

For Guay, getting the U.S. economy back on track is all about competitiveness.

“We need to focus on U.S. competitiveness, and when we do, we can grow 4% a year for five years and reduce unemployment rapidly.”

To increase the country’s global competitiveness, Guay recommends that:

  • The Fed gradually take real short-term rates up to normal levels
  • The U.S. Treasury and the Federal Reserve Bank of New York “rebalance the deposits they are taking from foreign central banks and use an appropriate share of that to finance exports, not just to subsidize housing and domestic consumption.”
  • Establish an investment tax credit “that would be 15% in the first year, 10% in the second year, 5% in the third, and 0% forever thereafter, so people would not come to rely on it.”
  • Give a tax holiday to money that U.S. companies have earned overseas but don’t want to bring home because it would be subject to double taxation.

“The combination of the investment tax credit and the repatriation of the foreign cash would finance an investment modernization boom that could be quite substantial,” said Guay. -- Bill DeRosa

Bill DeRosa is editor of CBIA News. He can be reached at bill.derosa@cbia.com.