The Register Citizen (Torrington, CT)
Recession coming; How will Conn. fare?
If you had any doubt a recession is coming, Wednesday’s 800point drubbing on the New York Stock Exchange, caused by the dangerous and infamous inverted yield curve along with Trump’s trade war, might have grabbed your attention.
Most economists peg a national downturn in the economy at somewhere between mid2020 and well into 2021. But even before the markets opened Wednesday, even before yields on the benchmark 10year Treasury bill fell below the rate on the 2year — a serious danger signal — economist Donald KlepperSmith came out with a bold and dire prediction.
“In my opinion, the odds of a recession are now above 50 percent in 2019, and 70 percent between now and end of 2020,” KlepperSmith, of DataCore Partners, said in an early morning note to clients.
He cites the signals from the bond market — a collapse of 10year yields indicates investors urgently parking their money someplace safe, sending interest rates down; weakening consumer confidence, especially future expectations; a housing market that may be running out of steam; signs of a slowdown in job creation; and a 3 percent rise in U.S. bankruptcies.
“The collective data sets have been pointing more and more to a domestic downturn, although the hard data says we’re not there yet,” KlepperSmith wrote.
The question for us in the slowgrowth state of Connecticut, of course, is what all this will mean for us. On that score, experts disagree.
“Worse than the nation, absolutely,” KlepperSmith, a longtime analyst of the state’s economy, said in an email response to my query. His logic: A lousy state economy to begin with, featuring a fiscal crisis that’s still not licked and business nonfriendly policies, can only get worse in a recession.
Not necessarily so, said Fred V. Carstensen, a UConn economist who heads the Connecticut Center for Economic Analysis. “Keeping our fingers crossed, we’re not going to be hit as hard as the rest of the nation.”
His logic: Defense spending and other uplifting factors such as large data centers coming online will buoy the state compared with the nation — though neither he nor anyone else thinks we will skirt a downturn altogether.
Another economics shinglehanger, Pete Gioia, chief economist at PGEcon, is on the negative side for Connecticut’s storm outlook. “We’ll go into recession earlier and we’ll probably stay longer,” Gioia said.
Uh oh, staying longer? We’ve seen this hurricane before. While the Great Recession of 200809 technically ended in June, 2009, making the current expansion a record ten years and one summer old, Connecticut arguably never made it all the way out — certainly not until 2011 at the earliest. And even then, we continued to show “negative growth” for years.
But that points to a sign of hope. Often in recessions, places that have the biggest overinvestments fall the hardest when the fan gets hit. Think Nevada housing in 200708, or the Connecticut office market in 1990.
This time around, much to our chagrin now, we ain’t got no overinvestment. Far from it; house prices have barely budged since the last recession in some places, and even now, they’re up a thin 0.4 percent across the state over the last year according to The Warren Group.
We are overbuilt exactly no place, and companies in Connecticut have hardly overhired.
So we have less far to fall, and as much as that hurts us now, it could help us when the inevitable recession does hit, whether it’s 2019 or 2022. It’s a fair bet that this time around, unlike 2008, Connecticut will see fewer home foreclosures than it might otherwise, for the simple reason that no one has bought into a hyperinflated housing market.
That’s partly how Emily Mandell, an economist at Moody’s Analytics, sees the picture. Universities and defense plants are a bulwark, but, Mandell said, a likely fall in the financial sector and a drop in investment returns leave the state vulnerable.
“Connecticut sees a bit less of a drop in employment but a bit more in income,” she said. “It’s really going to depend on who you’re talking about within Connecticut.”
Carstensen’s point about defense spending is huge, and KlepperSmith sees that as a silver lining, though not a saving grace. Connecticut is at a sixyear high in manufacturing employment, most of that supporting the defense buildup in all three major industries: jet engines at Pratt & Whitney; submarines at Electric Boat; and a new heavylift helicopter program at Sikorsky.
Ah, but we’re not adding jobs, Gioia and KlepperSmith say. And we still have policies KlepperSmith calls “borderline antagonistic” to business and a cost structure that make many businesses wary.
“We haven’t seen the effects of some of these new laws that are going into place, the [paid] family and medical leave, the minimum wage,” Gioia said. “Those will cost us jobs and they could cost us thousands of jobs.”
Then there’s income and overall growth. Connecticut has run at about half the rate of the nation in recent quarters, when we’re growing at all. That’s not a base for resiliency against a national downturn.
On the other hand, we’re seeing signs of an end to the state’s permanent fiscal crisis and some warming from Wall Street as, maybe, just maybe, the reforms of recent years — far too weak for the likes of many conservatives — are leading to a path to sustainable longterm liabilities. Recall, that’s the $60 billion or so in unfunded, longterm costs that the state has been trying to wrestle down.
As for timing of the recession, President Donald Trump’s volatility isn’t helping matters, as we see with the trade war with China, though that’s not a specific factor for Connecticut.
“Depending on the Tweet of the day, the damage can be undone fairly quickly,” Mandell said, but she added, “We’re not anticipating any resolution to this trade war by the end of President Trump’s first term.”
And Carstensen notes that Trump is throwing away the chance to avert a recession altogether, with a $2 trillion infrastructure program that he promised but refuses to delilver.
KlepperSmith believes the National Bureau of Economic research, the Academic group that calls recessions, won’t declare it officially until after the 2020 elections but it will be retroactive — not due to politics but because there is always a delay.
Connecticut, for now, remains its own worst problem. Bob Scinto, whose Shelton firm, R.D. Scinto Inc., is one of the state’s largest officeowners with 4 million square feet in 53 buildings, said he’s still almost entirely leased up and is not seeing a softening of demand for space due to declining business.
“Most of the problems we see here are state related, people wanting to leave the state,” Scinto said. “Businesses are still doing business and they’re busy but there’s a desire to leave the state and that’s the issue we’re dealing with.”