By Daniel W. Kennedy
After starting with a spurt, Connecticut’s job recovery has slowed to a trickle, going from an annual rate of nearly +0.9 percent in 2010-Q2 to barely nothing in 2011-Q1. Now the economy is sending mixed signals. The April 2011 U.S. jobs report of 1.3 percent annualized growth suggests an economy gathering momentum, but national GDP growth decelerated to a 1.8 percent annual rate in 2011-Q1.
The economy’s mixed performance makes clear that there are still significant drags on the current recovery. Continuing distress in the housing market is a major impediment to a robust recovery. Though consumers are repairing the liability side of their balance sheets, on the asset side housing prices are still declining, especially for median and lower income households. That could put a crimp in consumer spending, which could eventually “pull the plug” on the struggling recovery.
Other big risks: proposed spending cuts at the federal level, the dangerous game of chicken being played with the U.S. debt limit, and the year-end expirations of the payroll-tax holiday and temporary extension of unemployment benefits. Into the bargain, states are raising taxes, cutting spending, and laying off workers to balance their budgets, further sapping aggregate spending.
Here in Connecticut, the governor and state union leaders have come to a labor agreement that had yet to be ratified. The failure of the agreement would threaten the state’s recovery, a possibility reflected in two of the three macroeconomic forecasts that we use as exogenous drivers in our forecasting model.
As shown in the graph, under the forecast prepared by Yale economist Ray C. Fair, Connecticut could gain nearly 17,000 jobs between 2010-Q4 and 2011-Q4, followed by an even stronger 23,000-job jump in the four quarters after that, for a total of 40,000 jobs. But it would take strong U.S. export growth, recovering home prices, and a continued drop in the prices of oil and other commodities to make a Fair-based forecast a reasonable bet.
The risks noted above, however, make the projections based on either the International Monetary Fund (IMF) forecast or on the University of Michigan forecast more likely. The IMF scenario predicts a modest gain of 10,000 jobs between 2010-Q4 and 2011-Q4, followed by weaker (+8,000) job growth for the comparable period for 2011 and 2012, for a two-year-total of 18,000 jobs. The Michigan-based projection shows a 14,000-job four-quarter increase between 2010-Q4 and 2011-Q4, but only half that gain for 2011-2012, for a two-year total of 21,000 jobs.
Under my combined scenario, Connecticut looks to add 14,000 jobs between the fourth quarters of 2010 and 2011, and another 12,000 in the next four quarters, or 26,000 jobs in all.
Connecticut’s GDP grew by an estimated 2.2 percent in 2010. Given the expected slowdown in the economy throughout 2011 and into 2012, the most likely outcomes for GDP are gains of just 1.8 percent in 2011, and only 1.0 percent in 2012.
Daniel W. Kennedy is senior economist with the Connecticut Department of Labor, Office of Research and manages the economic forecast for The Connecticut Economy, a University of Connecticut quarterly review. His views are not necessarily those of the Department of Labor. This article first appeared in the summer edition of The Connecticut Economy.
