It depends who you listen to.
The Connecticut Center of Economic Analysis at the University of Connecticut declared last week that the state economy has been in recession since the third quarter of last year.
While that may sound like bad news, the CCEA is offering some optimism. They don’t expect the recession to be nearly as bad as state economic downturns in the early 1980s and 1990s.
CCEA forecasts a loss of 40,000 jobs — far less than the 160,000 lost in the 1989 recession — and a modest decline in the state’s economic output during this downturn. And the dramatic drop in petroleum prices could mean that the recession will be even milder than the group’s primary forecast.
“The recession will not be a deep one for the state … much less than recessions over the last 30 years,” the CCEA Economic Outlook concluded.
Then listen to Gov. M. Jodi Rell.
She predicts that a sharp decline in income tax revenues will blow up the state deficit to $2.6 billion in 2010 and $3.3 billion in 2011.
Rell said we are in the most tumultuous economic times since the Great Depression and that state government may need a radical overhaul. She has already called for cuts of $140 million, and the state does have a rainy day reserve of $1.4 billion.
But if the governor’s projections are in the ballpark, the state is going to have to slash services or raise taxes. She has said she is opposed to raising taxes in a recession.
Some might be inclined to think the governor is overstating the case, that the economic picture is not really that dire. Making the worst-case scenario argument could improve her bargaining position in the coming battles with the Democratic leadership in the legislature. The Democrats have majorities to override her vetoes of spending bills.
Whether or not Rell’s deficit projections include a posturing factor, it is now clear that falling income tax revenue from Fairfield County will force major adjustments. The state can no longer coast along receiving its share of the Wall Street bonuses and hedge fund winnings of the past.
In fact, the degree to which the investment banking and hedge fund worlds are affected by the current economic crisis will have a direct bearing on political decisions forced upon legislators at the capitol.
And the prospects for those two sectors remain very much in doubt. When Treasury Secretary Henry Paulson announced last week that he was shifting the focus of the $700 billion federal bailout package — after he’d appointed an inexperienced young Goldman Sachs protégé to run it — it became obvious that initial plans for spending the money weren’t getting enough traction in the markets.
Now that $290 billion of the package has been committed, political infighting has broken out over how to spend the rest. Everyone wants a piece of the pie, and there’s been no coherent policy to help sort out which groups will get theirs.
That uncertainty is daunting to people like John Whitehead, the former Goldman Sachs chairman, who now fears a slump deeper than the Great Depression. He can’t see how the government can shoulder all the burdens that are being dumped on it.
“I see nothing but large increases in the deficit, all of which are serving to decrease the credit standing of America,” he told Reuters. “Before I go to sleep at night, I wonder if tomorrow is the day Moody’s and S&P will announce a downgrade of U.S. government bonds.”
He went on to say, “I just want to get people thinking about this, and to realize this is the road to disaster. I’ve always been a positive person and optimistic, but I don’t see a solution here.”
Who’s right: CCEA, Rell or Whitehead? It’s too early to tell.
