By Demetrious Giannaros
Two years ago, the state, national and world economies were in desperate conditions. The future looked gloomy and fear was at a 70-year peak. Some of the pundits, who may have never studied the history business cycles and the power of the Central Bank and fiscal policy, were predicting “the end of the world,” in an economic sense. Thankfully, that did not happen anywhere.
We are on the mend and out economic recovery continues in 2011, although, at a slower pace than desired.
Yes, we went through the worst recession since World War II. However, the economy is growing, business activity and profits are rising, employment is increasing somewhat and consumer and business confidence is up, relative to last year. Even with a few bumps on the road, Connecticut’s economy is set to continue in recovery for the rest of 2011 and beyond.
As we predicted in our December article (with S. Jason Giannaros) in the Hartford Business Journal’s Trend Report, Connecticut has shown economic resilience. Our state GDP, employment, income and state tax revenue increased during the first half of this year and our state had one of the highest growth rates in 2010. Over the past year (see The Connecticut Economic Digest, June 2011), our state economy has added about 25,000 jobs with four quarters of continued growth.
State tax revenue is close to a billion dollars higher than was projected in the budget approved by the legislature last year. As indicators of increased business activity, over the past year (April 2010 to April 2011), corporate tax revenue on profits increased by 133.6 percent; income and capital gains revenues were up by 10 percent; real estate conveyance taxes increased by 11.9 percent and Indian gaming payments were up by 3.4 percent.
For the first four months of 2011, most of the tax revenue streams are up (corporate +43.1 percent, income +10.6 percent and conveyance taxes +2.3 percent) with the exception of gaming which seems to be flat and sales tax revenues contracted by one percent — which indicates some softness in consumer retail spending.
Moreover, new business entity starts are greater than terminations (1.6 percent versus 1.1 percent); employment was up by 1.2 percent and personal income by 3.8 percent (2010Q3 — 2011Q1).
All of the above indicates that our state economy was expanding during the first few months of 2011, albeit at a smaller pace than desirable to bring down the unemployment rate significantly. We expect that the expansion will continue for the rest of 2011 and beyond, barring unexpected international or internal shocks to the economic system. There are a few reasons for such expectation.
The most important is that the world economy is predicted to grow at a faster pace in 2011, as forecasted by the OECD. They project that the world economy will grow at 4.2 percent this year and 4.6 percent in 2012, while the U.S. economy is projected to grow by 2.6 percent in 2011 and 3.1 percent in 2012. The OECD stated that “the recovery is becoming self sustained with trade and investment gradually replacing fiscal and monetary stimulus as the drivers of economic growth.”
This bodes well for Connecticut — since we are one of the most export based states. Increased exports would be good for our financial and insurance services and advanced manufacturing, among other sectors.
Another positive factor that may enhance business investment and strengthen economic growth in Connecticut is Governor Malloy’s apparent success in solving next year’s budget deficit problem without significant increases in business taxes — but with significant sacrifices by state employees. Also, the governor’s bold proposal to expand the biomedical component of our economy through the investment at the University of Connecticut Health Center is a positive economic investment project for our future growth in biomedical products and services.
Connecticut is a state of innovation. There are many new business startups that come about as deep recessions encourage entrepreneurs to develop new solutions and products. Innovations are necessary to succeed in a very competitive global environment. These enterprises must be given priority for capital financing by both the state and the finance industry, if we want to remain leaders in innovation and per capita income with significant job growth. For the same reason we need to support and encourage organizations such as the Connecticut Invention Convention that promotes inventions by our youngsters at school.
Finally, we expect that next fiscal year’s state budget will come in with a significant surplus if the economy continues to grow. If so, we recommend that the corporate business surtaxes and related taxes should be reduced to encourage more fixed capital investments, research and development and new business formations. This will strengthen our economic recovery and job creation and surpass the 3.1 percent growth rate of 2010.
Thus, the state’s economic engine will be moving forward in 2011 and beyond, assuming Congress does not force a federal government default and there are no international shocks.
Demetrios Giannaros leads Giannaros Associates, a consulting firm based in Farmington, and is a professor of economics at the Barney School of Business at the University of Hartford. He can be reached at 860-614-3488 or via email at Giannaros@comcast.net.
