Economic recovery continues this year in both Connecticut and the U.S., but has yet to become the self-sustaining turnaround many experts projected.
One reason is that downside risks have increased to create a greater potential for stagnation or a return to recession.
For good news, it appears the keys to recovery ”“ jobs and consumer spending ”“ are strengthening, although the latter factor has weakened a bit. Connecticut has now had six consecutive months of job growth. The June jobs report showed that, after losing 3,500 temporary government census jobs, the state still posted a net gain of 500 jobs ”“ reflecting the strongest month for private-sector jobs in more than two years.
Five of nine labor-market segments in the state are positive in job creation year-to-date and seven of nine areas added jobs last month. Out of 23 job sectors, 13 are net positive for job creation year-over-year and 15 are positive month-over-month in June. This means Connecticut”™s jobs recovery is starting to become broad-based. Employment is also improving nationally.
Still, job growth will continue to be slow. Connecticut lost 101,000 jobs in the recession and it is unlikely the state will recover them all before the start of 2015. Nevertheless it is very possible that we will see net job gains in every month between now and 2012.
GDP figures are likely to be solid in the second quarter, yet will slow somewhat to 2 percent to 3 percent in the second half of the year. Inflation remains very low ”“ under 2 percent ”“ with the likelihood that the Fed will not raise rates for some time.
Results of CBIA”™s business, economic and quarterly credit surveys are supporting the scenario of a slow-growth recovery now and for the next 12 months. Estimates on hiring, productivity and production, and sales are good and expected to get better. Credit is still difficult for many small and midsize firms but is improving from its nadir in 2009.
But many other factors bear close watching. While consumer spending is still positive, it has slowed. Consumer confidence has fallen noticeably in the past few months. The Dow has had a rough few months hovering around 10,000. The end of federal housing incentives have slowed, but not stopped, gains in this area.
Political risk also remains quite high and could damage recovery. Tension with states such as Iran and Venezuela could spike energy prices. The European debt crisis could hurt us by both lowering demand for U.S. exports and by increasing the value of the dollar ”“ making our exports more expensive worldwide.
What”™s more, there is great uncertainty in the U.S. about how new financial services reregulation and health care reform will ultimately impact businesses and their costs. Potential legislation on carbon trading and union “card check” could scare investors. No one knows which Bush-era tax changes will survive or be modified and in what ways. In Connecticut, multi-billion dollar state deficits loom on the horizon for a new governor and legislature to be elected this November.
These factors will make business leaders think twice before making job-creating investments. The best-case scenario is that these considerable challenges will ensure a slow but not strong recovery. Worst case, they significantly add business costs and stall or reverse the economic gains that have been made.
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Peter M. Gioia is vice president and economist at the Connecticut Business & Industry Association in Hartford.
