Economist says expansion confidence has turned to recession gloom

By Scott Benjamin

Economist Donald Klepper-Smith says that last fall when he discussed "business cycle basics" during talks, some people buoyed by the gusts of the longest economic expansion in United States history thought that there would never be another recession.

"No one repealed the business cycle," Klepper-Smith told his audiences.

The recovery under former Democratic President Barack Obama and current Republican President Donald Trump was more than nine years old and unemployment was its lowest point in 50 years.

Klepper-Smith cautioned his listeners that, on average, recoveries last just five years and the current one was beyond nine years.

Then the pandemic occurred.

"Before this, there were people that thought that the recovery would continue forever," the economist said in a phone interview."Now we are at the other extreme. There are people that think that we will never see another recovery."

The Washington Post reported April 9 that unemployment claims are higher than any time since the Great Depression of the 1930's.

"It's premature to use the d-word,' " said Klepper-Smith, who was chairman of former Gov. M. Jodi Rell's (R-Brookfield) economic team. "We're in a recession, but it is still to early to tell how far we go beyond that."

He added, "However, this definitely is not an over and done proposition. This is the first inning of a nine inning game."

Klepper-Smith, who operates Data Core Partners and until recently was the economist for Liberty Bank, noted that recessions average about 18 months, and estimated it will take at least a year to get through this one.

He said that already, the economy has been stymied by "an ugly mess of inflation and deflation. Gasoline prices are going down and health care premiums are going up."

Washington Post economics columnist Robert Samuelson recently wrote that, "Economist Mark Zandi of Moody's Analytics is also down beat."

Zandi wrote a book on the 2008 financial crisis and another on the subsequent recovery of the the American economy.

Samuelson stated that Zandi wrote in an e-mail message that, "Households face lost income and lost wealth. Some $10 trillion in stockholder wealth (depending on the day and hour) has evaporated in the past several weeks. A powerful wealth effect - the relationship between households' wealth and their spending - will soon take hold. We estimate the effect in a down stock market to be 4.5 cents for every $1 decline in stock wealth."

Samuelson wrote that if continued, this would, according to Zandi, "crush consumer spending and the economy."

Klepper-Smith explained, "The stock market will be challenged over the next year. It is going to have an impact on the country both economically and psychologically."

"It could have a big impact on stock market portfolios," he said in reference to the ramifications in Connecticut's wealthy Fairfield County Gold Coast.

Klepper-Smith said there will probably be different obstacles in each region of Connecticut.

He said that in the eastern part of the state the two Native American casinos will need to become re-energized; in the New Haven region the life sciences sector will have to be reinvigorated.

Klepper-Smith said the recovery will primarily depend on consumer confidence, which "usually drives two-thirds of the economy." He said that the other two factors will be business confidence and what steps government takes.

He praised Gov. Ned Lamont (D-Greenwich) for focusing on the health of the residents.

"I give him credit," said Klepper-Smith. "It has been about protecting lives."

Regarding finances, Patch.com reported earlier this year that the state was nearly $2.5 billion in the rainy day fund, which was about 13 percent of operational costs. That should hopefully help address a projected budget for the current fiscal year that was recently estimated at $500 million.

Klepper-Smith also applauded the governor's debt diet in which he is trying to slash $700 million a year from the bond appropriations.

"Anything invoking fiscal discipline is positive for the business community," he said.

Klepper-Smith said before the crisis Connecticut had experienced an increase in advanced manufacturing, which has been Lamont's principal economic growth target since he took office last year.

The economist, who has said for years that Connecticut could be primed for a manufacturing resurgence, indicated that for every new manufacturing job an additional 1.5 positions are usually added to the work force.

However, Klepper-Smith said the Nutmeg State is poorly positioned to rebound effectively from the pandemic.

He said that before the crisis it had only recaptured 87 percent of the jobs lost during the 2008 recession, while nationwide the rate had been 250 percent.

"After the shock, I think that there will be more out-migration," Klepper-Smith said, noting that according to 2019 figures a net of 419 residents per week leave Connecticut, the sixth highest rate in the country.

Additionally, he said that Connecticut is plagued by an underfunded pension system for its state employees.

The state Commission on Fiscal Stability and Economic Competitiveness stated in its March 2018 report that the pensions for the state employees were only 29 percent funded.

CT Mirror budget reporter Keith Phaneuf said at Wilton League of Women Voters forum last year that the pensions for the state employees and the ones for the public school teachers, which the state funds, were structurally underfunded every year from 1939 through 2010.

Klepper-Smith said that based on 2018 data from Moody's Analytics, there was an 86 percent increase unfunded pension liabilities for state employees in Connecticut between 2010 and 2018. The figures indicate that the unfunded liabilities are the third highest in the country.

He said an updated report will probably indicate more dire circumstances following the pandemic.

"Will resolution come through spending cuts and renegotiated state labor contracts or tax increases on Connecticut consumers and businesses?" Klepper-Smith said.

Nationally, he said there were signs of a pending recession even before the pandemic.

Klepper-Smith said that in the fourth quarter of 2019 U.S. household debt exceeded $14 trillion for the first time, according to the New York Fed Consumer Credit Panel.

"We have an economy that is over-leveraged," he declared.

"The current figures on student loans are problematical," said Klepper-Smith. "It is preventing them from buying homes."