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Economists Downplay Connecticut's Wave Of Business Openings

Connecticut Businesses

By LYNN DOAN | The Hartford Courant

January 29, 2009

A record 13,456 Connecticut businesses closed last year as the nation's financial crisis worsened, but some state officials pointed to a possible silver lining: About twice that many businesses opened.

Yet even that number, economists said, may be just a cloud. The total number of businesses to start in Connecticut last year — 27,483 — is still 11 percent lower than the number of those that started up in 2007. The data were released Wednesday by Secretary of the State Susan Bysiewicz.

Economists also said it's not unusual to see business starts during a difficult economy because of layoffs.

"A lot of these folks are being forced into self-employment — out of necessity," said Don Klepper-Smith, chief economist for DataCore Partners LLC in New Haven and chairman of the governor's council of economic advisers.

The unparalleled number of businesses that filed to dissolve last year was no surprise to state economists, who say it's just a sign of rough economic times. But the large number — 18 percent more than in 2007 — shows how dire Connecticut's business climate has become, they said.

"When you look at the data, you start realizing just how hard the labor markets in Connecticut are being hammered at this point," said Klepper-Smith, who has predicted that Connecticut will continue to lose jobs and businesses until the beginning of next year.

Business closures may have surged by 18 percent from 2007 to 2008, but the rise pales in comparison to the 72 percent increase in closures from 2002 to 2003. During the last recession, which began in mid-2000 and ended in 2003, at least 23,000 businesses shut down, according to state records.

"The part and parcel of every recession that we've had has been a rise in the death rate of businesses and a decline in the birth rate," said Nick Perna, economic adviser for Webster Bank. "This is not surprising, though it's painful."

The real silver lining, Perna said, is that the large number of business closings is not the major cause for the state's 7.1 percent unemployment rate — the Department of Labor reported last week that Connecticut had lost a total of 21,300 jobs in November and December.

He said that while large companies and corporations are cutting jobs, most of the businesses shutting down are small companies with small staffs.

"These are small retail outlets, small restaurants ... the kinds of things people go into sometimes under-capitalized," Perna said. "The rise and fall of businesses are much more volatile than employment, because if we had an 18 percent drop in jobs, we'd really be in trouble."

Bysiewicz on Wednesday called on state legislators and the governor to establish "serious incentives" to encourage energy efficiency, expand the "green technology" sector and make available the state's health care plan to small businesses and nonprofit groups.

"We cannot afford to sit by … while more and more businesses shut down, leaving more people out of work and more families without income and health insurance," she said.

Peter Gioia, economist for the Connecticut Business & Industry Association, said it was "absolutely vital" for state policymakers to keep the closures in mind as they attempt to close a $922 million budget gap.

"They've got to try to do whatever they can with no or minimum tax increases," Gioia said. "We can't have a situation where we set ourselves up for failure and extend the duration of this recession with stupid moves."

Joan McDonald, commissioner of the state Department of Economic and Community Development, said her agency is trying to improve the business climate through recently established programs that, among other things, invest in energy conservation products and recruit high-technology firms to the state.

"We're realistic. We know that businesses are hurting," McDonald said Wednesday. "We recognize that we cannot increase taxes for small businesses, and we cannot add any more administrative burdens that would put Connecticut in the position of being business unfriendly."