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December 28, 2020 Economic Forecast

2021 will be a year of 'solid rebuilding'

By Steven P. Lanza

 

As Connecticut’s COVID death toll soared in spring, the state lost a staggering 291,000 nonfarm jobs.

Putting that number in perspective, it’s nearly twice the blow suffered in the early 1990s recession, more than four times the loss in the 2000 recession and fully one of every six jobs in the economy as of February.

Remarkably, by year’s end, the state had reclaimed two-thirds of the jobs given up. But the slowing pace of monthly employment growth suggests the easy part is over. Many who were temporarily laid-off have been rehired, leaving those permanently let go still looking for work.

The mounting surge of new infections across the country and across the state will impede that progress, but with vaccines rolling out early in the year, 2021 will be a year of solid rebuilding.

Expect the state to add 43,000 jobs over the year, with the largest gains accruing in industries hardest hit — leisure and hospitality, particularly accommodation and food services — as residents release some pent-up demand.

Among the laggards: government, as the state and its municipalities struggle with the pandemic’s economic overhang. With jobs returning, the unemployment rate will ease, continuing its descent from July’s 10% level to about 5%.

A word to the wise: these “official” numbers almost certainly undercount the jobless. The high volume of initial claims for unemployment insurance indicates joblessness could be double its estimated rate, according to state Labor Department analysts.

Assessing the toll on real output is more difficult because state GDP data lags that for the nation. U.S. GDP likely shrank just 3% in 2020, thanks to a torrid 33% annualized rebound in the third quarter, which offset the precipitous 31% drop the quarter before. The consensus forecast sees 4% growth in 2021, which would lift U.S. output above pre-pandemic levels. Against this backdrop, Connecticut output probably shrank about 5% in 2020, and my estimate of 3.9% state GDP growth in 2021 won’t be enough to recoup those losses. One possible omen of a brighter future: the state’s housing market is booming as virus-weary urbanites flee cities for the haven of Connecticut’s socially-distanced suburbs.

Steven P. Lanza is associate professor in residence at the University of Connecticut Department of Economics.

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1 Comments

Fred Carstensen
December 28, 2020

What this assessment ignores is how badly Connecticut's economy has performed since 2008--it shrank for years, ultimately by more than 9%, before a modest recovery. In February 2020 it was still short 17,000 jobs and in real value about where it was in 2006. And recovery will be undermined by the weakness of state finances: OPM and OFA project massive deficits of more than $7 billion through FY24. Yet both make optimistic assumptions, minimizing expenditures and maximizing revenue; a more realistic projection would be deficits over $10 billion. The rainy-day fund of more than $3 billion will offset less than a third of these deficits, arguing that there will be broad cuts to state support for municipal aid, higher education, NGOs, and other public services--and deeply undermine recovery.

There are clear strategies CT could pursue that would deliver significant benefits: unleash stranded tax credits to fund major capital projects; aggressively seek federal funds (CT has the worst record of any state, by a wide margin); reconnect with data-driven, digitally dependent modern IT economy (from which CT largely disconnected post 2008). Will we have the political leadership to implement need policies and initiatives?

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