Is Connecticut finally on the cusp of a robust economy, or has its modest recovery peaked, with the state about to head for another downturn?
Is its future rosy, or is the Nutmeg State headed down a path that mirrors the collapse Detroit began in the 1950s?
Though national and international forces will play a key role in answering those questions, state officials could make the difference if they pay attention to two crucial details, according to a new analysis prepared by a New Haven-based economic research firm and by the state’s chief business lobby.
Connecticut’s economic boom or bust may hinge on its ability to revive its manufacturing sector – and, in particular, compete more effectively for manufacturing.
Though it doesn’t grab as many headlines as cutting edge technology and bioscience fields, manufacturing still remains one of the most effective ways to grow jobs across a broad spectrum of the economy.
“It’s manufacturing that begets non-manufacturing – not the other way around,” Donald Klepper-Smith, chief economist with DataCore Partners LLC of New Haven, said this week, adding that for every manufacturing job added in Connecticut, the economic ripples create another 1.5 related or supporting positions. “When you start making things, you start talking about all of the other services that go into that.”
How competitive is Connecticut in attracting and promoting manufacturing?
Klepper-Smith and Peter Gioia, chief economist for the Connecticut Business & Industry Association, developed a new “competitiveness index.”
It ranks states in nine areas, awarding ratings points for each. They include:
- Electricity costs;
- Past growth in the state in manufacturing employment, exports and productivity;
- The presence of supporting science and technology sectors;
- Whether a state’s industries are part of a larger regional concentration of manufacturers;
- And, the growth in state and municipal government spending, taxes and debt.
Connecticut ranked 30th overall, but both economists said it could be five years or more before they have enough data to truly test the index’s effectiveness.
Still, Gioia said, the criteria behind it have value, and state policymakers would do well to focus on them now – particularly state spending.
“We can’t be complacent,” Gioia said, noting that health care and public employee benefit costs drive annual spending growth, on average, well above the rate of inflation. “The politicians have got to wake up and realize we have a problem.”
This problem not only triggers tax hikes that can prompt businesses to hold off adding new jobs. But these big cost drivers in the state budget eat up resources that otherwise could be invested in education, worker training, transportation and other areas that help manufacturers thrive.
Klepper-Smith drew a parallel between the Detroit area in the 1950s – when the heart of the nation’s auto manufacturing industry was thriving – and Connecticut of the last few decades.
Connecticut currently has about 162,000 manufacturing jobs, Klepper-Smith said, just over one-third of the positions this segment of the state’s economy had entering 1970.
And while manufacturing employment has fallen throughout much of the country over this time, Detroit once could boast a high per capita income – and struggled with surging government spending.
“In their wildest dreams, nobody in Detroit ever thought their city would see financial collapse,” Klepper-Smith wrote in a recent presentation of the competitiveness index. “The concepts of ‘fiscal discipline’ and ‘living within their means’ were never given serious consideration.”
The new $37.6 billion, two-year state budget adopted in June would boost spending about 10 percent in total over the next two years.
At the same time, Klepper-Smith said, real disposable income in Connecticut – the amount of money each household has to spend after taxes are removed and adjustments for inflation are made – is expected to grow by about 1.3 percent per year.
But Klepper-Smith added that one of the best ways to attack this problem is to take whatever steps are necessary to revitalize the defense industry.
The University of Connecticut’s chief economist, Fred Carstensen, echoed that emphasis on manufacturing, though he said government has to be careful about paring back its spending too much.
Investments in education, worker training and infrastructure can reap big dividends in economic growth, but Connecticut and other states have watched their recoveries stall, in part, because of shrinking federal, state and municipal government spending.
Federal budget “sequestration” alone has probably curbed national economic growth by as much as a full percentage point just this year, Carstensen estimated.
A mechanism designed to limit the size of the federal budget, sequestration places a hard cap on spending in several broadly defined areas. If Congress appropriates dollars in excess of these caps, it automatically triggers across-the-board cuts in all affected categories.
In this case, Congress exceeded limits set in the Budget Control Act of 2011, triggering $984 billion in cuts between 2013 and 2021.
The first wave of reductions, $109 billion, was supposed to have taken effect Jan. 2. It was subsequently reduced to $85 billion and is being phased in over the summer and fall.
Still, Carstensen said that states that bolster their manufacturing sectors will have a huge edge simply by recognizing an economic fact of life: American consumers simply can’t purchase as much as they used to.
Household income for most Americans has dropped steadily, after adjustments for inflation, over the last three decades. That drop was hidden in part as households’ ability to borrow became easier.
“We can’t resurrect the level of consumption that sustained the economy in the 1980s,” he said.
But the nation finally began to limit and reverse household debt after the last recession. For Connecticut manufacturers, that means they must find new consumers to buy their goods, in other states and overseas, Carstensen said.
Besides accelerating planned state investments in transportation and other capital projects, state officials also need to better mobilize business development centers – government efforts to help match up small Connecticut companies with new customers for their goods.
“Other states are now getting very specific analyses for their industrial centers to find markets around the globe,” Carstensen said, adding that the Nutmeg State has made some efforts in this regard, but not enough. “Connecticut is not yet really in that game.”