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Defense Worries A Microcosm Of CT Economy

By Dan Haar

January 04, 2013

There's good news and bad news for Connecticut in the Pentagon's spending strategy for the next several years, and that reflects what's happening in the state's economy overall.

The bad news is that defense spending in the state will decline by about 10 percent in the six years starting in 2010, according to Bob Ross, executive director of the state's Office of Military Affairs, citing Pentagon estimates.

"That sounds like bad news," Ross told a Hartford audience Friday at the annual economic conference of the Connecticut Business and Industry Association and the MetroHartford Alliance.

It certainly is bad news, considering that defense spending directly and indirectly accounts for about a tenth of the state economy, with 50,000 defense-related jobs and $25 billion in annual economic impact, making this the No. 3 defense-dependent state in spending per resident.

"But that's the lowest cut of any state," Ross said of the 10 percent. "We're building the right things at the right time in history. … I hope people walk out of this room not feeling beat up or pessimistic."

Florida and Pennsylvania are facing cuts of 30 percent or more, according to the report, in which the Pentagon tries to estimate how much work is actually done in each state — a moving target that's constantly changing and never very precise.

Part of the good news is not just that our haircut is less than that of our neighbors. That's not much solace. But these numbers have been known for a long time, so Connecticut can prepare for the cuts. And 10 percent can be absorbed by an industrial base that's seeing growth in commercial programs such as the Pratt & Whitney geared turbofan series of jet engines.

Getting back to the bad news: As Connecticut faces another ho-hum year of tepid economic recovery — the consensus of economists — there are other possible head winds. If Congress and Obama can't get their act together and avoid across-the-board defense cuts, which are still scheduled to start March 1, there's general agreement that Connecticut would fare much worse.

And speaking of Congress, the partial end of the so-called Bush tax cuts could hit Connecticut especially hard, said economist Nicholas S. Perna, because this state has more than its share of high-income households.

"I'm guardedly optimistic about the fundamentals of the economy," said Perna, economic adviser to Webster Bank. But he said he's worried about Congress having to deal with the deadline for across-the-board spending cuts, the federal debt limit, and the scheduled end of funding for federal agencies — all happening in March.

"These people aren't capable of handling one thing," Perna said, let alone three. And Connecticut has its own fiscal crisis, further slowing the economy.

Looking ahead to good news, a recovery in Europe would help Connecticut more than most states, and a recovery in the housing market is a big factor well beyond that industry. "That's a major driver of consumer confidence, when people see the value of their house go up," Perna said.

In more good news, Pratt & Whitney's robust geared turbofan sales will bring added work in a couple of years, and the company's biggest military program, the F135 engine for the F-35 Joint Strike Fighter, is performing very well, said Jay DeFrank, Pratt's vice president for communications and government relations. DeFrank said there's no indication that the 2104 Pentagon budget will contain a slowdown in F-35 orders, but he added, "We know it is always going to be facing attacks."

Until the F135 and the geared turbofan engines crank up to full production, DeFrank said, "We're looking at a couple of challenging years."

That has a ripple effect at places such as the Whitcraft Group, three Connecticut aerospace subcontracting firms co-owned by Colin Cooper. He had more work in the out-of-production F119 engine for the F-22 than he does in the F135, but he's diversified across several global manufacturers.

He's hopeful he can keep his entire workforce of 500 until volumes pick up again. "We're going to need those folks for these programs," he said. And so far, Whitcraft has resisted moving work to cheaper locations or buying firms elsewhere, but he added ominously, "We're always looking at that."

And so it goes for the state's economy. DeFrank and Cooper both said Gov. Dannel P. Malloy and lawmakers should stick to a stable tax and economic development policy — on research and development credits, for example.

Everyone agrees Connecticut should have a clear economic strategy and not try "to recreate who we were," as DeFrank put it.

What does that mean? "It may be that we don't need new answers," said Matthew Nemerson, president of the Connecticut Technology Council. "The issue is execution now. ... We're no different than a corporation. We have to be incredible users of data. We have to test our assumptions about the future, always."