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Updated: July 13, 2020

With CT’s economy still ailing from Great Recession, pandemic digs a deeper hole for state to scale

Photo | Nathan Oldham, UConn School of Business UConn economist Fred Carstensen said Connecticut’s economy has lagged for a decade and the coronavirus pandemic will only exacerbate the state’s challenges.

After months of relative isolation and various other sacrifices made by state residents and companies, Connecticut can, at least for now, declare a cautious victory against COVID-19.

Infection rates, hospitalizations and deaths continue to dwindle as the daily reality of social distancing, mask wearing and other precautions remain the norm.

But the pandemic has battered the state and national economies, and the recovery almost certainly won’t be the V-shaped bounce-back some economists and government officials predicted back in March.

Just as Connecticut has taken pains to slow the trajectory of COVID-19, some are now wondering whether the state can similarly reverse its pre-pandemic economic direction.

“If we recover from the pandemic, we are where we were in 2005 or 2006,” said UConn economist Fred Carstensen. “We have a very unhealthy economy and this has been something that’s happened over the past decade.”

Carstensen, director of the Connecticut Center for Economic Analysis, has frequently opined about Connecticut’s economic malaise coming out of the last recession, years before anyone ever heard the term COVID-19.

Key hindrances, which have also been echoed by other local economists, include stagnant population and GDP growth; deteriorating tax revenues in spite of tax increases; low-wage jobs replacing higher-income ones; a lack of technology infrastructure; misaligned corporate incentives; high levels of debt and other obligations; and a failure to attract as much federal funding as other states.

Those challenges would be difficult to deal with in normal times, but now the assessment takes on new weight as Connecticut begins to claw its way out of a large and unexpected coronavirus-induced economic hole. When state lawmakers convene in January to start crafting a state budget that begins July 1, 2021, they are estimated to be facing a two-year deficit in excess of $4 billion, driven by falling tax receipts, according to budget analysts.

Even with an unprecedented $2.5 billion balance in its rainy day fund, Connecticut’s situation remains dire, as there’s a deficit of up to $1 billion to close the fiscal year that just ended last month.

“We’re probably looking at deficits regularly running at 10% to 12% [of the annual state budget], which means that we have to have very, very dramatic cuts in a whole array of state activities,” Carstensen said.

It will almost certainly lead to a debate among lawmakers over raising taxes as well.

Carstensen’s remarks came during a June 30 virtual panel discussion about Connecticut’s economic outlook hosted by the Hartford Business Journal and New Haven Biz.

He was joined by Fred McKinney, professor of entrepreneurship and strategy at Quinnipiac University, and Daniel Cooper, senior economist and policy advisor at the Federal Reserve Bank of Boston.

More pain could be ahead

As Connecticut takes some modest comfort in its own success controlling COVID-19, numerous other states are seeing signs of a second wave, including Texas, Arizona and Florida.

The spike in cases, which some officials have blamed on the early easing of economic and social restrictions, have prompted another round of temporary shutdowns of bars, movie theaters, gyms and other businesses in those states.

“There’s a concern that reopening too fast has had some consequences,” said Cooper, the Boston Fed economist.

Connecticut residents may be behaving more cautiously, but the leap from the recent rate of under 100 new COVID-19 cases a day to something far worse is not so long, said Quinnipiac’s McKinney, noting that students from other geographies will be returning to Connecticut colleges this fall.

“We cannot rest in Connecticut with states around the country experiencing these spikes in cases and think they’re not going to affect us,” McKinney said. “We also have a risk of a second shutdown if we don’t control this virus nationally.”

Cooper said the consensus prediction from professional economic forecasters is that the national economy will fully recover sometime in 2022.

“The general consensus is it’s going to be a fairly drawn out recovery,” Cooper said.

The pace of recovery will depend on how consumers and businesses respond, and whether the virus can be held in check.

A second wave could mean a W-shaped trajectory, meaning the economy, after starting to rebound in the second half of this year, falls once more before eventually climbing its way out of the hole over a longer period, Cooper said.

It’s impossible to predict with much certainty, as the situation is so unique compared to past recessions and pandemics.

Congress injecting hundreds of billions of dollars in stimulus funds into the economy, or the Fed lowering interest rates to near zero, can all help.

“ … But at the end of the day, monetary policy can’t control the virus,” Cooper said.

McKinney is especially worried about the impact a second wave of the virus — and potential accompanying economic restrictions — will have on small businesses, many of which are already suffering from suppressed customer demand.

“I think [the small business] community is going to be particularly hard hit and it’s going to be a challenge for them to get back,” he said.

Businesses will need more help, McKinney said, but perhaps not in the same form as the U.S. Small Business Administration’s Paycheck Protection Program (PPP), which primarily helped cover companies’ payrolls.

While PPP has been extremely popular in general — infusing $6.6 billion into more than 57,000 Connecticut companies as of June — the SBA has struggled to dole out all of the available money authorized for the program, which nearly expired on June 30 with $130 billion in remaining funds before Congress extended it into August.

McKinney said businesses will need more help paying their fixed expenses, like rent, loan payments and other costs that were not PPP’s focus.

Cooper, who stressed that he was giving his opinions and not those of the Boston Fed, said the institution’s Main Street Lending Program — which provides loans that are almost entirely backed by the government — attempts to make credit more available as the COVID-19 recovery continues.

“These are loans, and of course, there are drawbacks to loans, and I would agree there potentially needs to be more direct fiscal support to households and businesses,” Cooper said.

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