Leading CT economist says national recession may be on horizon

By Scott Benjamin

A leading Connecticut economist says that there is a 70 percent chance that by the end of 2020 the longest economic expansion in America’s 243-year history will have turned into a recession resulting from “a credit risk that is now higher than during the 2008” downturn as well as the increasing impact of structural economic changes.

Donald Klepper-Smith, the economist for Liberty Bank who also was an advisor to two former Connecticut governors, said that in the fourth quarter of last year national household debt was 21 percent higher than it was at the start of the 2008 recession.

Car loans that are at least 90 days overdue are at an all-time high and “student loan debt continues to climb rapidly, which also has had an impact on first-time home buyers who are saddled with debt,” he said in a phone interview.

Former Trumbull First Selectman Tim Herbst, who sought the Republican gubernatorial nomination last year, told Brookfield Patch in 2017 that the next Great Recession will result from college student loan debt since many graduates will not be able to repay their loans.

Klepper-Smith, who chaired former Gov. M. Jodi Rell’s (R-Brookfield) economic team, also pointed to a 2017 ABC News report that 38 percent of the existing jobs in the United States would be eliminated within 15 years due to robotics, artificial intelligence and automation.

He said that job losses are currently 79 percent due to structural factors, instead of cyclical factors, compared to just 51 percent in the mid-1970s. Those structural factors include the cost of doing business and issues related to globalization.

Klepper-Smith said that despite the lowest national unemployment rate in 50 years, consumer confidence is declining. He cited a January NBC News/Wall Street Journal poll that indicated that 63 percent of the respondents believe the economy is going in the wrong direction.

Klepper-Smith, who directs DataCore Partners, said he expects the recession “to last longer than average because we don’t have access to the tools to get us out soon. We’ve already played the interest rate card and I don’t see appetite for another fiscal stimulus package. I expect that, given the highly leveraged economy that we have, it will last longer than one year.”

Ray Dalio – the owner of Bridgewater Associates in Westport, the largest hedge fund in the world – told CNBC in January that he is concerned that with already low interest rates that the Federal Reserve Board will have fewer resources to combat a recession.

Robert Samuelson, the economics columnist for The Washington Post, has stated that between 1982 and 2007 there were only two recessions - both relatively mild – that lasted a combined 16 months.

Klepper-Smith noted that since World War II the typical economic recovery has lasted five years. The New York Post has reported that the current expansion is now 10 years, one month, the longest in American history – exceeded the surge that began in 1991 under former Republican President George H.W. Bush and continued through former Democratic President Bill Clinton’s eight years in office and the early months of former Republican President George W. Bush’s tenure.

The economist said he believes there is a “50 percent chance” that the recession may start before the end of 2019, and therefore the two-year $43.4 billion Connecticut state budget that Gov. Ned Lamont (D-Greenwich) signed in June will not meet its revenue projections.

For years, Klepper-Smith has said there would be a recession before Connecticut recaptured all of the jobs it lost from the 2008 recession. He said currently only 81 percent have been recaptured and on the current pace it would take until the middle of 2021 to get back to the 2008 level. The state ranks last in New England in job recovery from the last recession.

He said maintaining and expanding the current base of 160,000 manufacturing jobs will be crucial, noting that each of those positions usually spins off 1.5 additional jobs in the Nutmeg State’s economy.

Thus, Klepper-Smith said the state will need to closely monitor developments in the proposed merger between defense and aerospace manufacturers Raytheon and United Technologies. Under the proposal, which was announced in June, several hundred executive positions would be moved from Connecticut to the Boston area, according to the CTPost.

On another topic, Klepper-Smith said Lamont’s reduction in debt bonding “is a step in the right direction,” since Connecticut needs to reduce it’s spending.

He said Connecticut is ranked second by the Tax Foundation in tax burden among the 50 states.

Klepper-Smith endorsed state Comptroller Kevin Lembo’s (D-Guilford) goal of maintaining a 15 percent rainy day fund. “It’s always better to have more money in the bank,” said Klepper-Smith.

However, he said the governor’s proposal to install toll gantries on Interstates 84, 91 and 95 and the Schuyler Merritt Parkway would increase the “outmigration’ from Connecticut.

CT Mirror has reported that Lamont is now offering to reduce the scope of his tolls plan and increase bond appropriations to pay for part of the state’s proposed transportation improvements.

Klepper-Smith said the state is currently losing a net of 428 people a week, while South Carolina is adding 943 people weekly.

But there have been some positive signs in population and job growth in Connecticut.

MSN.com reported in June that the per capita the New Haven-Milford area ranked second nationally in attracting millennials and the Bridgeport-Stamford-Norwalk region was ranked 29^th.

Klepper-Smith said that the New Haven area has added a number of jobs in health care and education, which usually are not impacted during a recession.

He has praised the metro Danbury economy during his talks in recent years at the Greater Danbury Chamber of Commerce’s economic forecast breakfast, noting that it has a diverse job base.

The Hat City ranks first in the state in sales tax revenue and first per capita in restaurants.

On another subject, Klepper-Smith called on the officials to renegotiate contracts with the public employee collective bargaining units that “the state can’t afford.”

The agreement signed by former Gov. Dannel Malloy (D-Essex) in 2017 has a no-layoff clause that extends to June 2021 and a benefits package that extends to 2027.

State labor officials have noted that a report from a consultant to the state Office of Policy & Management, the governor’s budget arm, has indicated that through employee concessions the 2017 agreement will save the state $24 billion over 20 years.

However, the March 2018 report from the state Commission on Fiscal Stability and Economic Competitiveness stated that the state employee pensions were only 29 percent funded.

CT Mirror recently reported that an analysis by Moody’s Investor Services stated, “Connecticut’s unfunded pension and retirement health care obligations coupled with other debt, represented 39 percent of its gross state product – the value of all goods and services produced – in 2018.” CT Mirror reported that it is the “highest among all states.”