By Peter M. Gioia
Vice President & Economist
ConnecticutBusiness & Industry Association
Many economic doomsayers continue spreading the word that the economy is in terrible shape and will get worse, but the facts just don't back that up. While government finances are still in turmoil, consumers remain skittish, and job growth is lagging, the worst is definitely behind us and, according to numerous economic indicators, a technical recovery is underway.
- The Economic Cycle Research Institute data forecasts a strong upward trend in the economy, which began in April.
- Housing starts have surged since last May, and, in many areas, price declines have abated despite increases in foreclosures.
- Institute for Supply Management indices have turned positive, particularly in production and new sales.
- Stock markets around the world have had double digit growth since March.
- European and Asian countries are generally growing faster than the U.S., which is good news for exporters.
- Inflation is benign at less than 1% indicating that the Federal Reserve can keep interest rates low until at least 2011.
- Chain store sales, while still subpar, have improved since May.
- Consumer confidence, while still weak in historic terms, has risen steadily over the summer.
- Job losses continue but at a much declined rate since the peak decline last December.
- Jobless claims which peaked in April have ratcheted downward.
- The GDP which was -1% in the second quarter of 2009 is expected to grow in the last two quarters of the year, signaling an end to recession.
Unfortunately, job growth always lags a recession, and we can expect more hardships before Connecticut moves forward. Business closings and housing foreclosures have hit record levels, but enough business-to-business activity and exporting will help create positive growth in the state.
The CBIA/BlumShapiro 2009 Survey of Connecticut Businesses confirms that businesses are suffering. While less than half (42%) of respondents expect to be profitable in 2009, another 30% project a net loss. Confidence is also hurting as 47% expect slow growth over the next year and 21% expect continued slippage in their business.
But the good news is that many firms are taking steps to position themselves for economic recovery. Fifty-eight percent of respondents are developing new products or services over the next year while 23% expect to increase R&D spending. Numerous strategies are anticipated to boost marketing and growth; 24% are looking at strategic alliances and 21% are looking for new acquisitions as examples. Other CBIA surveys also report increases in production, sales and productivity.
But challenges will remain and, while many businesses will begin to feel the positive effects of the recovery, others will not feel the effects for at least a year. That's because at least a quarter of the state's population has a close friend or family member who is out of work, coupled with continued housing and investment declines and the fact that people have less money to spend. That means that the 70% of the economy dependent upon consumer spending is not going to grow rapidly.
This leads to the big question -- how soon and how strong will jobs come back? Economic opinion is divided but there are two main schools of thought. One says jobs should come back strong because companies have cut too deeply, and productivity gains, while tepid, will require firms to hire to service increasing sales. The second theory is that structurally the economy will be different because of weakened consumer attitudes, tighter lending standards and prolonged unemployment forcing many to retrain or reeducate themselves for new, possibly lower-paying jobs.
Which theory is correct? Only time will tell, but there are ways to track change. If we see increasing amounts of overtime, hiring by temporary agencies and lower numbers of unemployment claims, that would point to the positive, first scenario playing itself out. For the second scenario, it's important to watch consumer confidence, government regulations and the worker retraining programs which are part of the $787 billion federal stimulus package. Only $20 billion of those funds have been spent so far, providing relief for the unemployed, but it will take much more time to see if the programs are working and if they will help solve the problems facing the economy.
To stay abreast of the economic changes facing Connecticut and the nation, and for up-to-date survey data, visit http://www.cbia.com/.