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Connecticut's Economic Trend Worst In Nation

Only State Where Economy Shrank in 2012, New Report Shows

By MARA LEE

June 07, 2013

A report from the Bureau of Economic Analysis shows that Connecticut was last in economic growth last year, the only state in the nation where the combined value of goods and services produced shrank compared with 2011.

The report measures GDP, the sum of what residents, businesses and the government spend, plus investments and net exports. The value is in constant 2005 dollars, which controls for inflation. By that measure, total state GDP fell $250 million in 2012, to $197.2 billion.

Not only did the state GDP decrease by 0.1 percent in 2012, it fell by the same amount in 2011, a substantial downward revision of the last year's initial estimate of two percent growth.

In 2010, when the initial estimate suggested Connecticut had one of the strongest growth patterns in the country, the state's GDP only grew by 1.2 percent, half the rate of the nation.

It's a grim account of what's happening in Connecticut, said Don Klepper-Smith, an economist with DataCore Partners in New Haven.

"Our economic development policies and tax policies, while well-intentioned, are not serving us well," he said.

The only good news in the revisions is that the drop in 2009 was not nearly as large as first estimated. Initially, the Bureau of Economic Analysis reported that the state's economy shrank by 5.3 percent that year. Now the bureau says the economy fell by only 3.6 percent, just a little worse than the national GDP drop of 3.3 percent.

While nearly every sector is growing more slowly than the national average, the report reveals that the biggest factors for decline biggest culprits are government austerity and troubles in real estate businesses and financial services and insurance.

Nationally, government spending cuts subtracted 0.04 percentage points from GDP growth, and the end result was 2.5 percent growth.

Connecticut, however, subtracted .25 percentage points.That figure covers not only the reduction in state and local government and public education, but also falling revenues at the casinos.

Only in Wisconsin and Louisiana did the government sectors shrink faster. Florida's shrank at about the same pace as Connecticut.

Gov. Dannel P. Malloy said that the shrinking government sector was partly to blame for the state's falling GDP.

"One of the things that Connecticut has done, which is showing up in these numbers, is shrink the size of government faster than just about every other state," Malloy said. "That is not generally understood. So that has a negative impact [on the economy] and specifically had a negative impact in 2012."

Nationally, the finance and insurance sector rebounded, growing 3.6 percent, which contributed 0.28 points to the 2.5 percent growth rate. Only the durable goods manufacturing sector fared better.

In Connecticut, finance and insurance shaved 0.57 percentage points from the state's GDP, according to this first estimate. The size of the drop in that sector was so dramatic that it almost swamped the combined total in economic growth in construction, retail and wholesale trade, temp services, private education, arts, restaurants and hotels.

The number of jobs in Connecticut finance and insurance has continued to fall in 2013. In April, the most recent data available, there were 2,300 fewer jobs than there had been a year earlier.

Klepper-Smith blamed Connecticut's hedge funds, banks and insurance companies on decisions by corporate executives to locate work in other states with lower salaries, insurance costs and taxes for the weaknesses.

He said executives believe officials' approach to businesses is "borderline antagonistic."

Klepper-Smith also blamed the poor growth on Connecticut's cost of doing business, which was ranked by one group as No. 5 in the country.

The same report said that Massachusetts is No. 2, but the state economy grew at 2.2 percent, a rate better than that of Kentucky, where the cost of doing business is the lowest in the country. California has the most expensive cost of doing business and the state economy's growth of 3.5 percent puts it in the Top 10 for growth..

Klepper-Smith said, "There are no simple answers here, we're talking about complex problems here."

The best-performing sectors in the state, according to the report, in 2012 were durable goods manufacturing, a category that covers consulting firms and private equity firms and information, which includes both information technology and companies such as ESPN.

Nationwide, only agriculture and government were in decline. In Connecticut — in addition to the big drops in finance, insurance, real estate and government — there were declines in economic activity in utilities, nondurable goods manufacturing, transportation, professional services, health care, social assistance and other services.

Andrew Doba, a spokesman for the Malloy administration, said Thursday afternoon that Klepper-Smith is wrong in characterizing the state's business climate as "borderline antagonistic."

Earlier in the day, Malloy acknowledged the report is not good news and admitted a need for improvement. But he pointed to the 8,600 jobs added in 2012 and the 14,300 jobs added in 2011 as reason to trust his economic policies. If it weren't for government and casino job losses those years, the two-year total would have been more than 26,000.

Klepper-Smith said that Malloy's aggressive wage subsidies, grants and subsidized loans to companies were misguided.

"Economic development at its best is not about picking winners and losers," he said. These approaches, he said, "have put us behind the eight ball to the point where we have to rethink those economic policies. If this isn't a call for that, I don't know what is."

Capitol Bureau Chief Christopher Keating contributed to this report.