Edward Deak is an economics professor at Fairfield University and was formerly head of the department. He is also the Connecticut model manager for the New England Economic Partnership, which produces a semi-annual New England forecast.
The newest New England forecast just came out. How has Connecticut fared?
E.D.: Connecticut up to this point is growing in terms of job creation at a pace that it hasn’t seen in the last seven or eight years.
We added 17,600 jobs last year, and for the 12 months through April, we’ve added 20,300 jobs. That is a big set of numbers for Connecticut, considering that two years ago we added 12,000 jobs, and three years ago we added just 5,000 jobs.
Connecticut has finally become a participant in the national recovery.
What kinds of jobs have been more available over the past year?
E.D.: The largest gains were in health services and education, and most of that is in health care. There were also large job gains in professional and business services, and a lot of those were in scientific and technology services, so that’s good for family incomes.
Another sector was leisure and hospitality, and a lot of that was in accommodations and food services.
One interesting note is that even though the housing sector has slumped considerably in the state, construction employment is 2,000 more workers than were out there in April 2006. That shows that the weakness in housing construction hasn’t hit the building industry as of yet.
When do you think that might happen, and how severely?
E.D.: Basically we’re looking for the decline in the national and state housing industries to eventually spread to the larger economy probably after the middle of this year and to continue into early 2008. The housing decline and the problem with the sub-prime mortgages are definitely going to act as a drag on the state and national economy.
Part of the slowdown on the national level reflects the problems of the exotic mortgage loans. And the problem loans appear in Connecticut as well.
What’s the housing outlook?
E.D.: Last year, home permits in the state were down over 22 percent, and this year through March they’re down 34 percent more. If you look at Connecticut home sales, they were down almost 12 percent last year, and they’re down an additional 5 percent in the first quarter of this year.
Sales have been very tough so far in the second quarter.
What you have is a situation in which housing inventory is higher, time on the market is longer, buyers are fewer, and delinquencies are rising.
All of that leads us to believe that the slump in the housing market is going to spread to become an active drag on the larger national and state economies.
How will all this affect Connecticut?
E.D.: There’s no sign of a recession either at the national or state level, but if the housing situation continues to deteriorate, it will most likely rein in the lofty job growth numbers that have appeared over the last 16 months. It could happen starting later this year and through 2008.
Connecticut is projected to run a budget surplus of $600 million to $800 million this fiscal year ending June 30, and the legislature and the governor are in negotiations now trying to figure out what to do with that money, maybe even raising taxes more. But steep increases in tax rates may not be as productive as expected, with extra revenue in the face of a state economy that’s growing less robustly.
The stock market seems to be surging after very positive first-quarter earnings reports, but inflation has not disappeared, the housing slump continues, and energy prices are once again lofty. Is the U.S. economy on the verge of a major downturn?
E.D.: There’s no sign of a major downturn at the national level. The odds of a downturn are placed at between one in four or one in three.
Certain sectors, including capital spending and manufacturing exports, are expected to expand later this year and into 2008 to help compensate for any drop in consumer spending.
So, an actual recession at the national or state level is still unlikely at this point. It’s going to be a period of restrained national growth through 2008, with possible cuts in interest rates by the Federal Reserve later this year but more likely in the first half of 2008.
But lots of analysts cast severe doubt on interest rate hikes. Why do you disagree?
E.D.: Any Federal Reserve increase in interest rates would be triggered by higher rates of core inflation, and the expectation is that core inflation rates, which have been moderating of late, will continue to decline toward the Fed’s comfort zone.
Core inflation is measured excluding price changes for food and energy. If you don’t drive your car; if you don’t turn on the lights; and you don’t buy groceries, then the inflation picture looks pretty good for you.
The average family isn’t going to see a lot of potential from the moderating core inflation rate, and the reason for this is that energy prices are rising, and food prices are rising, so more stable core inflation rates are not likely to show up in the wallets of readers.
Many analysts fear that the strong asset markets reflect excess liquidity. What’s wrong with that?
E.D.: Interest rates are rising worldwide, and central banks are removing liquidity from global financial markets, and all of that is to try and restrain inflation outside the U.S.
If the current surge in the Dow Jones Industrial Average reflects excess global liquidity — lots of countries making lots of money available — then the Dow may be in for a correction, as global liquidity diminishes.
