Dan Haar: ‘Soft landing’ for U.S. economy, but how about Conn.?

by Dan Haar

The national economy is gliding to a so-called soft landing, an elusive, almost mythical slowdown without a recession, the president of the Federal Reserve Bank of Boston told a Hartford audience Monday.

That means no recession in the consensus Federal Reserve policymakers’ forecast for this year, at least, as inflation and unemployment both remain at historically low levels.

“This is what a soft landing actually looks like, it’s about as good an outcome as we could have hoped for,” Eric S. Rosengren, the Boston Fed chief, told 500 people at a conference of the Connecticut Business & Industry Association. “We haven’t had unemployment this low with monetary policy this low in a long time.”

What it means for Connecticut is a complex question, as we’re looking at a slowdown without ever having sped up.

Nationally, the consensus among Fed policymakers is for no changes in 2020 in the federal funds rate, the main tool the Fed uses to tighten or open the money spigot, Rosengren said. He opposed the three rate declines in 2019, arguing that the economy didn’t need the juice and the risks outweighed the benefits.

In his view, the risks are still on the “upside,” meaning the dangers are not so much from a global shock such as a worsening of the Iran crisis or the trade war that would slow the economy. “The trade problems haven’t been as big a concern some thought,” he said in an interview after the speech.

Rather, the concern to watch is that inflation could spike unexpectedly or consumers and companies could take unwise risks that drive financial assets to unsustainable levels.

For now, inflation remains under the 2 percent target and will for the foreseeable future, and unemployment will remain under 4 percent. Overall growth will remain at or below a 2 percent, sustainable though less than a heady boom.

That’s all great for the reelection chances of President Donald Trump especially following 2019’s big market gains. Many economists had predicted a 2020 recession just a few months ago.

Less far to fall

The question in Connecticut is, regardless of the nature of the slowdown, will the state fare better than the nation, catching up a bit of lost ground from a lost decade? Or will we weather economic changes poorly because we’re starting out disadvantaged?

“I think we have lower to fall, I really do,” said Alissa DeJonge, economist for the Connecticut Economic Resource Center, acknowledging that many sing a more pessimistic tune about Connecticut.

In her view, which I share, Connecticut job creation, home prices and overall economic activity will fall less in a national slowdown for the simple reason that we don’t have the sorts of overhangs that lead to recessions in the first place. The opposite of that would be what happened in Nevada in the Great Recession housing meltdown, where overbuilding led to a mighty crash.

Connecticut certainly doesn’t have much overbuilding and we also hold the ace in the hole of defense spending, with one class of submarines in full production and another another in design at Electric Boat; a new heavy-lift helicopter in production at Sikorsky; and the controversial but huge F-35 Joint Strike Fighter program powering Pratt & Whitney.

And the commercial aerospace industry, obviously global, remains strong with deep backlogs. “From an export point of view,” said Anne Evans, director of the U.S. Department of Commerce export assistance center in Middletown, “our aerospace sector will do pretty well, our machinery sector will do pretty well…USA machinery still means a lot.”

Add to that a state emergency reserve fund that will approach or exceed a healthy $3 billion this year and the hope that millennials hitting their 30s will favor Connecticut’s suburban lifestyle — and we have reason to believe the state is in position to come through a national slowdown fairly well.

Less room for error

On the other hand, and there is always the other hand in economics, Connecticut is still looking at state budget shortfalls. Home prices remain flat especially in Fairfield and Hartford counties. And job creation stands at just a fraction of 1 percent, year over year.

That means there’s less room for error and declines could hit harder than elsewhere. “I think it will be worse because we never really recovered as robustly as the rest of the nation or the rest of New England,” said Susan Coleman, a recently retired University of Hartford finance professor who’s still doing research and following the state economy.

“The cost of living is already high,” Coleman said. “That’s going to accelerate the outmigration, particularly if we have tax increases” to fill budget shortfalls.

Connecticut has the fourth-highest percentage of people moving to other states, after people moving in are netted out. The reason for that is a constant source of debate. On the stage at the Marriott Monday, CBIA President Joseph Brennan appeared to try to coax Rosengren to say the state needs lower costs, including taxes and utilities. Rosengren, famously a believer in investments to build up infrastructure and the workforce, didn’t bite.

“If you’re not getting people to come into Connecticut, then what you have to do is get people who are not working to come into the labor force,” Rosengren said — which is why the Boston Fed launched its Working Cities Challenge to revive midsize cities a few years ago. ‘

Rosengren added, in an interview, “taxes rarely are the major driver in an economy.” And when I asked him how badly Trump’s limit on state and local tax deductions is hurting, he said, “You relocate for a job, you don’t relocate because taxes are high or low.”

‘More negative’ in Conn.

The key is successful cities, and that’s why Boston-fueled Massachusetts and Maine (driven by Portland) are outperforming Connecticut. But Hartford, with a strong industry mix, and New Haven, with Yale, should be doing better than they are, Rosengren said.

The answer: Keep working on cities and investing in education. On Tuesday, UConn and Gov. Ned Lamont will talk about UConn’s contribution to the state, a defense of yet-higher spending there, which — who knows? — Lamont might propose.

Rosengren wouldn’t say whether he thinks Connecticut will fare better or worse than the nation in a downturn, but he said the slightly higher unemployment rate here than elsewhere in New England — still under 4 percent — gives Connecticut employers room to find workers, and that’s crucial right now.

If attitude matters, Connecticut could be in trouble. “When I talk to business leaders they tend to be more negative than the economic data,” Rosengren said.

Likewise, Brennan, at CBIA, said, “On a micro level, when I’m talking to companies, I’m hearing good things.”

The group-think is what’s negative and we could stand to change that. Another key is resilience as companies fight harder.

Fuss & O’Neill, the large engineering firm with offices throughout New England, including Trumbull, and its main location in Manchester, is diversifying as the number state projects remains flat.

“We’ve already kind of been overcoming that,” said Craig Lapinski, senior vice president and regional manager for Connecticut. “For right now it’s business as usual…Our backlog is healthy .”

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