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Worst-Case Scenarios
How would the state fare in a national recession? It depends on what kind
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Business New Haven
3/5/2001
By: BNH
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Whether the national economy is heading toward recession or merely a “soft” landing, Connecticut business people may well reflect on how they'd fare if a recession occurs.
The Connecticut Center for Economic Analysis (CCEA) has studied how two different what-if recession scenarios for the U.S. economy would impact the state. One scenario models a drop in consumer spending as might result from a stock-market collapse or a severe decline in consumer confidence.
The second models a decline in investment, as might occur if interest rates rose sharply, or if businesses cut capital spending due to excess capacity or loss of confidence in future market growth. In each case, the simulated recession begins in 2001 and lasts the entire year.
In a consumption-driven recession, state employment takes a bigger hit than the U.S. as a whole. But real gross state product (GSP) keeps pace with the U.S. decline for the year, and in 2002 Connecticut outperforms the nation in both variables.
However, in an investment-led recession, both employment and GSP do worse than in the national economy. In the CCEA model, state employment drops 2.8 percent versus the nation's 2.4 percent, and real GSP falls 2.0 percent compared to the nation's 1.8 percent. But the state's rebound in 2002 is again more pronounced than the nation's.
CCEA also examined how the Nutmeg State's critical manufacturing and FIRE (finance/insurance/real estate) would fare under alternate slowdowns in the U.S. economy.
Under the model, manufacturing loses more jobs than FIRE in both investment- and consumption-led recessions, but is hit harder in the first model. In a consumption-driven model, Connecticut manufacturers drop 5.1 percent versus 5.5 percent nationally, while in an investment-led downturn, Connecticut does slightly worse than the national average (a 7.5 compared to a 7.3-percent drop). In both cases, however, state manufacturing performs better than the U.S. in 2002 and beyond.
The state's FIRE sector, however, loses more jobs and performs worse than the U.S. in the consumption-led scenario, and in both models its recovery lags the nation's.
The conclusion? The state's performance in the event of a national recession would depend on the nature of the downtown. A consumption-led recession would be easier on us than an investment-driven one. This is consistent with the state's relatively high wealth and incomes, which drive consumer spending. But a consumption-led recession would hit our FIRE sector harder.
In sum, CCEA says, either kind of slowdown will cause Connecticut to feel pain. But longer term, CCEA concludes that the state's economy would prove more resilient than the nation's.
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