Financial firms injected more than $3.5 billion into the Connecticut economy in the form of additional personal income, a “stunning” figure according to a think tank that ironically could demonstrate the state”™s growth economy wobbles on a shaky foundation.
The state”™s finance sector stands on the twin stilts of Fairfield County”™s investment funds and Hartford”™s insurance companies. With leveraged buyouts driving much of the income gains, the Connecticut Center for Economic Analysis (CCEA) questioned whether the state”™s economy will be able to maintain its stride as financial markets absorb shocks such as the subprime mortgage crisis.
The center is affiliated with the University of Connecticut.
The report was issued as the Federal Reserve Bank indicated in early August that the U.S. economy should be able to keep up its moderate expansion even amid uncertainty over residential mortgage and construction markets.
Already the top county in the United States in per-capita personal income, Fairfield County”™s 2006 growth rate of 6.9 percent numbered among the top gainers in the country, excluding areas rebuilding after the 2005 hurricanes. Pumped-up compensation has helped the county weather a decline in population, with the latest figures from the U.S. Census Bureau showing 10,600 people moved out of the economy between 2005 and 2006, offset partly by the arrival of 6,600 immigrants.
Personal income is an important cog in the models developed by the CCEA, according to Peter Gunther, the center”™s senior research fellow, although changes to how the U.S. Bureau of Economic Analysis calculates production have CCEA re-evaluating its models.
The state added 4,000 jobs in June and 20,000 jobs in the past year. Given the padded paychecks state residents are enjoying and the purchasing power they produce, CCEA predicts a 4.2 percent growth rate for this year, but in the same breath says growth could bottom out at 2.7 percent if the finance sector seizes up.
“That big surge came from financial services, a highly volatile sector, probably driven by mergers, buyouts and leveraged financial activities,” Gunther stated in his quarterly assessment of the state economy. “If this is a short-term blip, then Connecticut”™s economy will enjoy only modest growth and employment will only sneak by its previous highs by the end of 2009.”
Besides the boom in financial services, state manufacturers are benefiting from a decline in the U.S. dollar that is making their products more attractive overseas, CCEA indicated.
Regardless of the vitality of financial services, “ominous” signs in the real estate market point to Connecticut”™s economy not keeping pace with the rest of the nation after next year, with a decline in new residential permits overshadowing a recent increase in construction jobs.
“This outcome results probably from offsetting increases in other construction ”“ schools, universities and state-run institutions ”“ as well as renovations, repairs and nonresidential construction,” Gunther stated. “But this strength in construction employment may be fleeting; total output in the sector is down 9.3 percent for the first half of 2007 compared to the same period a year earlier, and the pipeline looks weak.”
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