US and Connecticut continue to narrowly avoid a recession

“If you get your textbooks out, we should be in a recession right now or we should be in a recession in the next few months,” said John Traynor, president of Cambridge Trust Wealth Management of Connecticut, in his annual Economic Update to the Greenwich Chamber of Commerce at the Greenwich Water Club on Nov. 29.

Traynor portrayed the economies of both Connecticut and the U.S. as being in positive places that defy traditional expectations, but he also emphasized that the right policy decisions and moves by the Federal Reserve Bank are necessary to maintain that equilibrium.

“Last year,” Traynor began, “I said that the most important person is the chairman of the Fed. This year it’s the same story. I know Chairman Powell comes under a lot of fire, a lot of people saying, ‘Gee I really think he messed up,’ but I think he’s done a pretty good job over the past two years raising rates and sending a consistent message.”

Traynor expressed some concern about the Fed’s move away from a proactive approach to setting economic policy to a more reactive one of making minor adjustments to maintain momentum. However, he emphasized that slowing inflation and a cooling housing market were signs that the economy was moving in a stable and reliable direction, and that a “soft landing” where prices gradually dip instead of crashing might be possible.

“The economy is slowing. I know we had a 4.9 GDP growth in the third quarter, but the consensus right now is about 2% for the fourth quarter,” Traynor said. “But just to give you a sense of how things are, when I was here last year the consensus for growth in 2023 was 0%. We are probably going to finish this year at 2.4%.”

Traynor said that the coming year is likely to see “a slower economy but not the big recession.” He pointed to the Conference Board Leading Economic Index which indicates a recession is likely in the very near future based on cyclical patterns, if not well overdue. Thanks to a combination of apparent consumer confidence and strong spending plus still-circulating funding injected during the pandemic, employment appears strong and many Americans have excess savings.

“Because of Covid, and we could have a great debate about all the different Covid plans,” Traynor said. “But basically because of Covid, $2.1 trillion in excess savings went into all of our checking accounts. One of the best estimates we’ve seen is that we still have 500 to 600 billion dollars in excess savings.”

On the state level, Traynor praised the installation of “economic guardrails” by Connecticut’s government and said the Rainy Day Fund had grown about as large as it possibly could.

Traynor, however, saw reason for concern when it comes to the impact of deglobalization on the state. While Connecticut benefits from a robust advanced manufacturing sector supplying military and defense equipment, many consumer goods still come from overseas.

“If you think about why inflation has been low for many, many years, we have been importing disinflation,” Traynor said. “Think about China. We were making shirts in Noth Carolina garment factories. Well, all that production went to China and now we’re able to bring in lower cost shirts, lower cost goods, we were importing those lower costs. As we move away from globalization that could be a problem for us, we have an awful lot of debt out there.”

An aging population and widening achievement gap also caused Traynor to express some concern about the state’s future. He described the state as likely destined to continue to receive a low ranking by the Tax Foundation.

Nonetheless, he stated that if the state can improve the returns it sees on investments in communities, it can continue to see improved performance in economic indicators. He emphasized this is particularly important for realizing the potential for lower-income communities with poorer educational achievement, since the attractive advanced manufacturing jobs across the state generally require at the very least a GED if not a certification program.

In all, Traynor depicted an economy that is decidedly slowing down, but not crashing.

“One of the questions that I have when I’m building our clients’ portfolios is, are we going back to the way things were? Are we going to stay flat? Or have we entered a new realm? Well, this is a pretty big breakout,” Traynor said of interest rates in the foreseeable future. “If you’re in finance, if you’re in real estate, you know that we’ve all been sailing with the wind at our backs, so there could be a change going on here.”