Economist says state probably lost over 200,000 jobs in April

By Scott Benjamin

Economist Donald Klepper-Smith says the United States has plummeted into a "formidable recession that is likely to last at least through the first half of 2021" and that Connecticut state officials should not, as long as "it is legal," take "anything off the table" in their search for savings from the economic repercussions associated with the pandemic.

Nationally, the unemployment rate, which in February had been at 3.5 percent - the lowest in more than 50 years - soared to 14.7 percent in April, the highest rate since the Great Depression of the 1930s. There were 20.5 million Americans that lost their jobs during April.

Klepper-Smith of DataCore Partners estimated that based on the national numbers, when the Connecticut unemployment figures are released on May 21 they will likely show that more than 200,000 jobs have been lost.

He said since the 2008 Great Recession the Nutmeg State had recaptured 102,800 jobs.

"We probably have lost more than the jobs gained in just about a decade in just one month," said Klepper-Smith. "It is as though we are falling off a cliff."

He said, in comparison, there were 120,000 jobs lost during the Great Recession and 156,000 job losses during the recession of 1989 to 1992.

CT Mirror reported on May 1 that the state had a projected $7 billion budget deficit over the next three years.

"The rainy day fund wasn't designed to absorb this kind of shock," said Klepper-Smith, who has been the featured speaker at the Greater Danbury Chamber of Commerce's Economic Forecast breakfast.

Connecticut's state rainy day fund was near $2.5 billion before the pandemic struck in mid-March.

"We're not in a position to direct money to economic recovery because of the high legacy costs for the state workers," Klepper Smith declared in a phone interview with Patch.com. "The state is going to have to think outside the box. Any and all savings need to be explored. I don't think that anything that is legal should be taken off the table."

The state Commission on Fiscal Stability and Economic Competitiveness reported in March 2018 that the pension system for the state employees was only 29 percent funded.

On a related topic, Klepper-Smith complimented Gov. Ned Lamont (D-Greenwich) for his performance during the pandemic.

"His priority has been people," he exclaimed. "He has thought about the safety for citizens."

New York Times economics columnist Paul Krugman wrote on May 12, "If we could get the coronavirus under control, recovery could be very rapid. True, recovery from the 2008 financial crisis took a long time, but this had a lot to do with the problems that had accumulated during the housing bubble, notably an unprecedented level of household debt. There don't seem to be comparable problems now."

Klepper-Smith, now semi-retired and who until late last year was the economist for Liberty Bank, disagreed with Krugman.

"People are talking of a V-shape recovery, but it is mathematically impossible," he said. "The pandemic has caught many people off guard. There are people now that don't think that there ever will again be an economic recovery. There is going to be a change in consumer activity."

Klepper-Smith said a report from J.P Morgan Chase has stated that nationally it might take 10 years to recapture all of the jobs lost during the pandemic.

In April, he told Patch.com 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.

Klepper-Smith insisted that the economy was over-leveraged prior to the pandemic.

Regarding the housing market, The Wall Street Journal reported on May 11 that although safeguards were established on the quality of mortgages following the 2007-2008 subprime crisis the mortgage companies doing the lending are not well structured to absorb late monthly payments from homeowners. The newspaper added that "[59 percent] of them are nonbanks that don't have deposits or other business lines to cushion the blow."

"Regulators cracked down, and mortgages made today are generally more conservative," The Wall Street Journal wrote. "What regulators didn't focus on was the strength of the mortgage companies themselves. Though the loans are sturdier, the infrastructure largely didn't change."

Klepper-Smith agreed, saying that mortgage lenders "are operating on small margins and are not in a position to accept continued delays in payments. I therefore expect a significant rise in non-payment loans."

The Federal Reserve Bank of New York's Center for Microeconomic Data for April indicated that 44,2 percent of the respondents "expect house prices to decline over the coming year."

Klepper-Smith said at some point the economy has to rebound on its own strength.

Larry Kudlow of Redding, the director of the National Economic Council, told ABC News' "This Week" on May 10 that the White House is currently "collecting ideas" in conjunction with Congress and will probably not consider any further economic stimulus until at least early June. Nearly $3 trillion in stimulus has been approved since March 27.

However, CBS News reported on May 12 that the House Democrats presented a new $3 trillion stimulus proposal that would, among other things, funding for state and municipal governments and mortgage assistance. They plan to hold a vote later this week.

Remarked Klepper-Smith, " I think the federal government is trying to figure out the next move. You can't continue to borrow your way out of this. You have to address the revenue side."