Built into Gov. Ned Lamont’s budget proposal is an economic forecast for both the nation and the state of Connecticut that anticipates a slowdown in job growth, new housing starts and relatively flat state economic growth, according to the Economic Report of the Governor.
Connecticut has yet to fully recover from the effects of the COVID-19 pandemic and government closure of businesses, having regained nearly 90 percent of the jobs lost during that time, according to the economic report, and there remain roughly 100,000 job openings.
While Connecticut’s gross state product has returned to pre-pandemic levels, according to the report, an anticipated slowdown for the national economy in terms of output and jobs is expected to trickle down to Connecticut resulting in relatively flat growth and some job loss.
Gross state product (GSP) for Connecticut in 2022 was up 4 percent, making up for the 3.9 percent loss over 2020 and 2021, but trailing the rest of New England, which grew at 4.5 percent. GSP is predicted to grow .6 percent in 2023 and .4 percent in 2024 before “leveling off in the 1 percent range” in 2025 and 2026, according to the report.
Job growth is expected to increase by 2 percent this year, then decline .6 percent in 2024 and remain “relatively flat” 2025 and 2026. According to the numbers, that means either zero or slightly negative job growth in the outyears. Connecticut will still remain 3.3 percent below job levels prior to the 2008 recession, according to the report, and job growth remains slightly lower than the rest of New England.
Housing starts — after dramatically increasing during the pandemic years when waves of people moved into Connecticut from more densely populated areas of New York — are expected to cool off, along with the rest of the country amid rising interest rates set by the federal reserve to combat rapid inflation. Real estate listings have also declined nearly 18 percent from the pandemic years.
Personal income, however, is projected to continue an upward trajectory, growing at roughly 4 percent over the next three years, according to the report. Connecticut has the second highest income per capita in the nation, with Massachusetts taking over the top spot in recent years.
Fears of an economic recession have been in the air as inflation hit record numbers this past year and the stock market experienced one of its worst years since 2008. Despite some recent mass layoffs at technology companies, job growth has continued nationally, and unemployment has remained low.
The recent downturn in the stock market could affect Connecticut’s budget, which relies heavily on the financial sector for income tax revenue.
The anticipated slowdown in both the national and state economy are reflected in the budget numbers with a growth rate of 3.5 percent in the first year and only 1.8 percent in the second year.
During a budget presentation, officials from the Office of Policy and Management (OPM) indicated they were preparing for a slowdown, but not necessarily a recession, and have assumed lower growth for income taxes related to Wall Street earnings, trimming nearly $180 million from income tax estimates and finals projections.
“We have very conservative revenue estimates generally and we work with an economic projection firm,” said OPM secretary Jeffrey Beckham.
In the event of an economic downturn or unanticipated decline in revenue, however, Connecticut continues to maintain a hefty reserve fund of over $3 billion, which can help avoid any tax increases should the economy enter recession and revenue projections fall short.
Connecticut was recently met with news that Pepperidge Farms would be moving their headquarters and 170 jobs to New Jersey but will maintain their bakery in Bloomfield. LEGO also announced it would be moving its long-time North American headquarters from Enfield to Massachusetts, impacting 740 jobs.
Lamont made reducing the state’s income tax on working- and middle-class families the lynchpin of this budget address and proposed putting more funding and efforts into workforce development and increasing the pass-through entity tax credit for small businesses.
On the housing front, Lamont proposed putting $600 million over two years into various programs to increase workforce housing and aid those seeking to buy their first home.
Of course, these are only projections in what has become a volatile economic picture, nationally, and OPM warns that various national and international factors could result in changes down the line.
“Many factors could contribute to a deviation from the above projections, including: the trajectory of inflationary pressures and any additional responses from the Federal Reserve, the status of the war in Europe, labor shortages in various parts of the economy, and the political stalemate in Washington over the looming increase to the nation’s debt limit,” the report says.
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