A Connecticut economist and a central banker described the economic recovery as slow and tepid Tuesday, but gave business executives hope that it’s on an upward trajectory in 2014.
Webster Bank Economic Adviser Nicholas Perna and Federal Reserve Bank of Boston President Eric Rosengren told about 500 business executives at an economic summit in Hartford to plan for economic growth of about three to four percent in 2014.
That’s as long as Congress and elected officials here in Connecticut “don’t mess it up,” Perna said.
But there have been at least two reports recently released that show exactly how lawmakers could have a negative impact on the recovery.
A University of Connecticut professor issued a report last month claiming that If it wasn’t for the policy uncertainty in Washington, another 20,000 people might be employed in Connecticut today. Another group of economists at the Center for Economic Analysis reported that Connecticut’s real unemployment rate would be closer to 10.7 percent if participation in the job market were the same as it was in the second quarter of 2010.
Perna disagreed with the report from the Center for Economic Analysis because he said it didn’t account for normal retirements.
“Things aren’t great in the Nutmeg State, but they’re not as bad as some would make them out to be,” Perna said.
As far as Connecticut’s economy is concerned, “we are lagging, even though we are growing,” he said.
He pointed to the 15,000 jobs the state created last year and economic forecasts, which show the state creating between 15,000 and 25,000 jobs this year.
However, Perna warned that just like in 2011 the state is staring down $1.1 billion to $1.4 billion budget deficits over the next three years — according to the legislature’s nonpartisan Office of Fiscal Analysis.
In 2011, the state faced a $3.67 billion budget deficit. It’s a fact Democratic Gov. Dannel P. Malloy likes to bring up in conversation more often than the fact that in 2015 the state faces another deficit.
“It’s like Groundhog Day, but it isn’t funny,” Perna said referring to the 1993 movie by the same name. “At least Bill Murray made you laugh. This makes you cry.”
He said he’s not a “deficit-nutter” but “when dealing with the deficit, [if] the way you deal with it impairs the first future growth of the state economy, then I become a deficit-nutter.”
He said that when the economy started to recover and gross domestic product stopped falling in 2009, Connecticut was growing as fast as the United States.
“Since 2011, our growth has lagged behind the United States,” Perna said. “One of the big differentiating factors between pre-2011 and post-2011 was the fiscal measures that were taken to get rid of the budget deficit.”
He said there’s no way of getting rid of a $3 billion budget deficit without inflicting pain, and the state doesn’t have the luxury the federal government does when addressing its budget problems.
Perna said the state has to be careful not to borrow too much money to get out of this budget mess. He said what lawmakers often don’t realize is, “if you borrow too much, you impoverish the very people who bought the bonds in the past.”
He said most of the bonds issued by the state of Connecticut are held by citizens of the state of Connecticut.
“When the interest rate goes up on those bonds because credit risk is perceived when deficit spending gets too high, then the holders of those bonds are taking a hit,” Perna said. “It’s a tax increase that would discourage them from buying in the future.”
So what should the state do?
“I think the big challenge to the next governor, to the legislature, is first of all can they do this budget re-balancing without further harming the Connecticut competitive environment,” Pern said.
If the state wants more jobs, then can the next budget be used to improve the Connecticut competitive environment?
“It will take a lot of heavy lifting. Otherwise, what you’re forced to do is to chase companies that are being poached by other states or threaten to leave the state, to chase them because of a deteriorating competitive environment,” Perna said.
Rosengren, who opened up the summit Tuesday, said that economic indicators are improving, but that the Fed still needs to remain vigilant about moving interest rates too quickly based on slack in the labor market.
Rosengren, who was the lone dissenter on a decision to taper bond buying last month, told business executives that the sluggish economic recovery was putting a strain on the unemployed. He said the rate of employment for 25- to 54-year-old workers — those who are most likely to be in the workforce — has remained fairly flat over the past few years. That means “we’ve only been growing jobs for those people at roughly how quickly that population of people has been growing.”
What the Fed has to take into account “is the cost of a very slow recovery relative to the risk of taking more aggressive action,” Rosengren said.
He said the plan was to wait until the nation got to 6.5 percent unemployment before they start raising short-term interest rates, “but we’re probably going to wait well-past the 6.5 percent, which means we’re not going to see short-term rates moving up very quickly.”
He said the Fed planned to maintain an “accommodative” policy for quiet awhile because “we still have an unemployment rate that’s too high and an inflation rate that’s too low.”
The summit was sponsored by the Connecticut Business and Industry Association and the MetroHartford Alliance.