Economic forecast: a risky year for Connecticut

Hartford -- An economic outlook conference greeted the New Year cautiously Friday, pointing to the slow and largely jobless recovery from the 2008 recession and the inability of Congress to reach a grand bargain necessary to avert devastating cuts to Connecticut's defense industry.

"I think everybody here knows we dodged a bullet this week. We got an 11th-hour reprieve on the fiscal cliff," said Jay DeFrank, vice president of government relations at Pratt & Whitney, the jet-engine manufacturer. "And while this week's action by Congress was entirely necessary, all it's done really is delayed the inevitable."

Congress and the White House agreed this week on taxes, but the threat of automatic and deep spending cuts from the so-called "sequestration" process remains as Washington struggles over how reduce the federal deficit by $1.2 trillion over 10 years.


Friday's economic forum at the Hartford Marriott was sponsored by the Connecticut Business and Industry Association and MetroHartford Alliance.

"We can expect battles over defense and government spending to not only continue year after year, but I would project they will intensify. For those of use who are suppliers to the Department of Defense, we can expect relentless pressure on keeping our cost low," he said.  "For those of us who do business in Connecticut, which is a notoriously high cost state, this is pretty ominous news."

The conference organized by the Connecticut Business & Industry Association and the MetroHartford Alliance was held as the U.S. Department of Labor reported that U.S. employers added 155,000 jobs in December, too few to lower the unemployment rate of 7.8 percent.

Christine Cumming, the first vice president for the Federal Reserve Bank of New York, told the conference that even if the economy strengthens, unemployment could rise as jobless people now discouraged from even looking for work get back in the job hunt.

She said that the Federal Reserve is committed to providing economic stimulus until unemployment falls to 6.5 percent. With a core inflation rate of less than 2 percent, the central bank does not see inflation as a threat.

"We've had a lot of stimulus and not a lot of growth," she said.

Focus on defense

But a key focus of the economy was the defense industry -- and the threats posed by federal budget cuts.

Connecticut firms involved in the industry employ about 50,000 and generate $25 billion in economic activity. The state ranks eigth in defense spending and third in per-capita defense spending, according to the state Office of Military Affairs.

Robert T. Ross, the executive director of military affairs office, offered a relatively upbeat view, even though Connecticut can expect a 10-percent cut in defense spending as the military retrenches after the protracted land wars in Iraq and Afghanistan.

The good news, he said, is that other defense states will see cuts twice or three times as large.

"We are building the right things at the right time," Ross said.

The strategic emphasis on the Pacific bodes well for the state's submarine industry, while the submarine base in Groton has been modernized and is better position to withstand a new round of base closures the Pentagon is expected to attempt in the next few years, he said.

Ross said base closures are not an immediate budget cutting tool, since the process poses a huge upfront cost. The last round in 2005 cost at least $21 billion, with more recent estimates ranging as high as $35 billion, he said

The closures yielded savings of only $3 billion a year, beginning in 2018.

"We've got to get costs under control now," he said.

Joan K. Woodward, the president of the Travelers Institute, a think-tank sponsored by the insurer, advised members of the business audience to turn off their televisions until late February, when Congress will face its next crisis point: agreeing on spending cuts to keep sequestration at bay.

Until then, she said, all you will hear from the talking heads is noise.

"Fiscal sanity can happen in this country," she said. "We are optimists."

From cliff to pothole

Nicholas S. Perna, the economic adviser to Webster Bank, said the stakes are higher in the next phase of trying to nudge the country away from a politically inspired fiscal crisis, since raising the debt ceiling will be part of the next round of negotiations.

"It has enormous ramifications," Perna said.

The U.S. credit rating was downgraded in 2011 when Congress threatened to block raising the debt ceiling, raising the specter of the U.S. defaulting on bonds purely as the consequence of a political decision, not an inability to pay.

"That's playing with fire, OK?" he said.

Perna said Congress must deal with the deficit on two tracks: avoid drastic cuts now that will return the U.S. to recession, yet somehow lock in long-term steps to cut spending, especially on Social Security, Medicare and Medicaid.

"A deal without dealing with the debt ceiling is not a deal," Perna said. "We have to be careful not to substitute a fiscal pothole for a fiscal cliff."