🔒Carstensen: CT has assets to change its economic trajectory. Can it leverage them?

Will Connecticut’s economy recover by 2025? By 2030?

Connecticut faces a serious challenge to climb back to where it was in 2008, even 1987, not just in Feb. 2020, before COVID-19 shutdowns hit.

Our economy never got back to where it was in 2008 in payroll employment, or in real (inflation-adjusted) state output.

Now Connecticut is recovering more slowly than the national pattern and seems unlikely to regain its economic and competitive health for years.

Focusing on employment statistics clarifies the scale of what Connecticut faces. As of Nov. 2021, employment in Connecticut was 1.624 million, 79,000 jobs below the most recent peak in Dec. 2018. Compared to the earlier employment peak in March 2008, the deficit is larger: 96,700 fewer jobs.

More revealing is that this level of payroll employment is about where Connecticut was in March 1987. If, somehow, the state added 5,000 jobs a month — an unprecedented level of growth in recent decades — it would still be nearly two years before reaching the previous 2008 peak.

But the situation appears to be worse. The Connecticut Department of Labor gives us both payroll employment, which is the number of people employed at Connecticut companies and in the public sector, but also the employment of Connecticut residents, regardless of where they work.

As the economy struggled since 2008, tens of thousands of state residents — because they could commute from their home — took jobs out of state: employment of residents reached an all-time high of 1,855,700 in Nov. 2020. That employment has now collapsed: as of Oct. 2021, it was 1,703,300, about where we were in July 2005.

Despite our flagging economy after the Great Recession, Connecticut did not lose population between 2010 and 2020, according to the U.S. Census. That was because neighboring states — Massachusetts, New York and Rhode Island — enjoyed robust growth in both employment and real output and offered ample opportunity for our residents to commute to new jobs.

Some Connecticut businesses — e.g., Pfizer, GE Capital — also moved thousands of jobs to those states, compounding this dynamic. Those jobs, that opportunity, now seem to have disappeared in large measure; will those households, looking for new jobs, leave the state because they can no longer commute?

Over the last decade, the state also lost thousands of high-skill, high-wage jobs as two leading sectors — nondurable manufacturing and finance/insurance — contracted sharply, while adding low-skill, low-paying jobs in tourism, hospitality, logistics and eldercare (none pay more than $40,000 annually working full time).

The result has been a sharp contraction in income tax revenue from withholding of more than $500 million annually relative to aggregate household income (this includes income earned out of state, dividends and capital gains).

Sales tax revenue relative to aggregate household consumption has declined annually more than $200 million. If these numbers are roughly correct, then Connecticut’s fiscal stability is now dependent on highly volatile tax revenues from capital gains and dividends.

Absent a change in its economic trajectory, Connecticut is likely to face robust deficits within a few years, after the rainy day fund is drained.

But Connecticut has an advantageous location between powerfully growing metros, still offers an attractive (and competitive) quality of life, has a strong and expanding aerospace sector, the basis of a competitive biomedical sector, and, with the new data center legislation, the potential to build a strong IT infrastructure.

History casts a long shadow; Connecticut has the basic assets that — with appropriate initiatives and investments — are the basis for growth.

We can significantly shape our own future. Will we have the insight and courage to do what must be done?

Fred Carstensen is the director of the Connecticut Center for Economic Analysis and a professor of finance and economics at UConn’s School of Business.