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Raring to Go: The Economy in 2012

Key indices point in the right direction. But the glass is still half empty, or half full.

 

The economy is like a racehorse at the gate, raring to go. Or as Patrick J. Flaherty, an economist at the Connecticut Department of Labor puts it, everything is in place for takeoff. Except that the economy hasn’t taken off yet. 

The good news is that pockets of strength continue to emerge, as reflected by the national unemployment rate, which dropped to 8.6 percent in November — down from 9 percent in October — the lowest it’s been since March 2009. The unemployment rate in Connecticut was 8.7 percent in October, the latest month for which data is available. Whether this will hold steady into the coming year is anybody’s guess.

Another vital measure, household debt, has shrunk steadily for 12 financial quarters. According to data from the U.S. Federal Reserve, total consumer debt, which peaked at $13.8 trillion in 2008, declined by 8.6 percent in the first half of this fiscal year.

What’s more is that American corporations are sitting on a pile of greenbacks. According to a report from Moody’s in July of this year, 1,647 companies rated by the agency had a combined $1.2 trillion in cash at the end of 2010, up by 11 percent from the previous year.

All this household and business money is waiting to be spent.

Closer to home, the bipartisan jobs bill that was passed in October by the Connecticut legislature will put a large share of $626 million in state borrowing in the hands of small businesses across the state. If this money reaches businesses that are sure to succeed, we are paving the way for regional recovery in 2012. Heads of several small businesses primarily in the technology area are telling me that they have increased their employee base in the last year and will continue to hire in the coming year. But this only in pockets.

More of the good stuff: Regional banks are flush with cash to lend.

Yet none of this negates the fact that the economy is still on rocky terrain, and will remain so until further deleveraging by households takes place and the housing market continues to recover. Consumer spending, coupled with companies investing in business innovation and expansion, is what will spur growth, going forward. But most important is what happens to the economy at the national level.

As Patrick pointed out, Connecticut has so far mirrored the national statistics. So any positive change at the national level will be good news for our state. That means the Gross Domestic Product (GDP) must inch its way upward for businesses to create jobs. In other words, he said, Connecticut would sink or swim with the national economy.

Steven P. Lanza, an economist at the University of Connecticut and executive editor of the quarterly publication Connecticut Economy, told me that we’ve seen 800 jobs added on average per quarter in Connecticut because the U.S. GDP growth is around 2 percent. But we’d need at least 3 percent GDP growth to spur the kind of job growth that is required for recovery.

Steven and many other economists are hoping that the housing market will bottom out next year, paving the way for revival.

The other issue — which Steven raises — is the ongoing impact of Gov. Dannel Malloy’s tax increases and spending cuts on the state’s budget.

One thing we need to be mindful of is how the state is spending taxpayer and bond money to boost the economy.

During a recent meeting with Matthew Nemerson, president and CEO of the Connecticut Technology Council in East Hartford, I discussed the issue of accountability of state spending.

Matthew rightly pointed out that state money simply cannot go to businesses that think they should have it; otherwise the funds will burn up quickly with little to show.

The council, according to Matthew, has identified methods to ensure accountability of monetary assistance by collating data from surveys.

One such process is to divide small businesses into three groups: Businesses that will succeed because of their leadership, idea, and execution strategy. Businesses that are expected to succeed but are failing. And businesses that will most probably fail.

He said the first two groups don’t show up very much on surveys because they are too busy succeeding and growing, or too busy figuring out how to succeed.

“The state should identify these businesses and invest its resources in the first two groups to see returns,” Nemerson pointed out.

Much hinges on the tone of public policy, and whether or not it creates an environment conducive to both consumers and businesses to invest in the future. A lot of it comes down to confidence.

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