An Economic Forecast for Connecticut’s 2020: Changes, Challenges & Opportunities
/by Alissa K. DeJonge
The largest contributor to Connecticut’s gross domestic product (GDP) is the finance, insurance and real estate industry, which is more than twice the size of the second largest industry. Professional and business services; manufacturing; and educational services, healthcare, and social assistance also comprise large portions of Connecticut’s GDP.
Connecticut’s real private-sector GDP declined from 2008 to 2011, and has experienced ups and downs but no significant, sustained growth since. In terms of employment, the largest number of employees in Connecticut are in the educational services, healthcare, and social assistance (327,000 workers); professional and business services (221,000); and retail trade (181,000) sectors.
These three sectors and the other seven that comprise the top ten in terms of employment (manufacturing; arts, entertainment, recreation, accommodation, food services; finance and insurance; other services; wholesale trade; construction; and transportation and warehousing) together account for 97 percent of statewide private sector employment.
There is a myriad of industries in the state that are innovating and changing. The Connecticut industries listed below represent relatively large groups of employment and are classified as traded industries, or industries that sell or export their goods and services outside the local markets. These industries represent both core strengths in Connecticut, as well as some legacy activities that have the potential to continue to carry the state’s economy into the future.
Advanced Manufacturing
There are approximately 75,000 advanced manufacturing jobs in Connecticut which created $12 billion of state gross domestic product in 2018. Advanced manufacturing includes activities such as aircraft parts, boat building, fabricated metals (e.g. tools, hardware, wires, coatings, etc.), machinery (e.g. elevators, semiconductors), and computer and electronic products. The sector’s relative employment concentration, or location quotient (LQ),6 is 2.0, meaning that Connecticut is roughly twice as dense in employment in this sector relative to the United States as a whole. The jobs multiplier is relatively high at 2.6, representing the total number of jobs created when one job is created in this sector.
“Advanced Manufacturing represents a substantial share of the state’s workforce, and positively affects jobs in other industries because of its high multiplier effect.”
This sector represents a substantial share of the state’s workforce, and positively affects jobs in other industries because of its high multiplier effect. However, this sector is expected to see flat to slightly decreasing employment in Connecticut and the U.S. through 2028 because of productivity improvements through technology advances. However, this industry is particularly important for the state because almost one-quarter of its jobs pay above the state median wage and include benefits but do not require a college degree.
Insurance Services
Insurance services is another mainstay in Connecticut’s economy, employing approximately 47,000 people and producing $14 billion in state gross domestic product in 2018. Insurance services covers several lines including life, health, medical, and property and casualty. This sector’s relative employment concentration, or LQ, is exceptionally high at 2.9; and there are positive ripple effects in the economy because its jobs multiplier is approximately 4.0.8 This sector is expected to see some growth at the national scale because of expansions in emerging markets and increased demand for services; yet decrease at the state level, primarily because of technology changes affecting the workforce.
Financial Services
With approximately 37,000 employees, the financial services sector in Connecticut comprises a substantial share of the state’s total employment. In addition to banks and credit unions, the financial services sector includes securities and financial investments. This sector contributed $9 billion to the state’s gross domestic product in 2018. Its relative employment concentration, or LQ, is also high at 1.6, and its jobs multiplier, or total number of jobs created when one job is created in this sector, is very high at 2.5.
“With approximately 37,000 employees, the financial services sector in Connecticut comprises a substantial share of the state’s total employment.”
This industry is poised to increase in the nation as a whole through 2028, yet there is a more subdued scenario for Connecticut during that time period. Technology changes, as have been seen with all of the other industries, will certainly affect the financial services industry over the next several years. In addition, many advanced economies, particularly in Europe, are likely going to see persistent low growth, low inflation (or deflation), and near zero (or negative) interest rates, which will adversely affect growth and profitability for the banking industry all over the world.
Software and Data Services
This sector employed 33,000 people in Connecticut and created $7 billion in state gross domestic product in 2018. Companies in this sector are involved with software publishing, data processing and hosting, computer programming, computer systems design services, and internet publishing and broadcasting. Its LQ, or relative employment concentration, is larger than the national ratio at 1.2, while its jobs multiplier presents a hefty 2.1.
This sector is expected to grow 4.3 percent nationally between 2018 and 2028 and grow by almost 1.0 percent in Connecticut during that time period. Cloud computing and artificial intelligence continue to grow in this sector, and more companies will see the benefits of processing data locally (also known as “edge computing”) to improve response times and save bandwidth.
Biosciences
The biosciences sector employs 17,000 workers and contributed $6 billion in state gross domestic product in 2018. Bioscience activities include medicine and pharmaceutical manufacturing, optical instrument and ophthalmic goods manufacturing, surgical and medical instrument manufacturing, dental equipment manufacturing, and research and development.
This sector’s relative employment concentration, or LQ, is 1.3; and there are positive ripple effects in the economy because its jobs multiplier is 2.9. For the nation as a whole, this sector should see job growth of 1.9 percent between 2018 and 2028; while for Connecticut the outlook is growth of 0.8 percent. Approximately 16 percent of its jobs pay above the state median wage and include benefits but do not require a college degree. As digitization continues to assist how companies innovate, there are opportunities for both startups and large companies in Connecticut to take advantage of the changes.
Technology Advancements are Disrupters and Opportunities
Technological advances abound and are affecting the economy in numerous ways. For instance, an increasing number of processes are becoming automated – such as self-checkout kiosks in many retail locations and algorithms that personalize marketing messages to potential consumers. Automation will continue to disrupt labor markets in more industries, having workforce implications. However, there can also be an opportunity for Connecticut’s software companies to thrive because of the increasing demand for services.
“There can be an opportunity for Connecticut’s software companies to thrive because of the increasing demand for services.”
Another trend that is affecting the entire economy is the ability to process more data more quickly. Consumers and the workforce are data-savvy, and companies are using data to stay ahead in terms of understanding their markets. There are opportunities for FinTech and InsurTech companies to expand their markets in Connecticut. The greater use of advanced materials (such as very light or very strong) in manufacturing processes is an industry trend that has tremendous opportunity for the advanced manufacturing industries in Connecticut.
Demographic Trends Affect the Connecticut Economy
Connecticut has had population declines each year since 2014, with the 2018-2019 decrease being 6,233; bringing the 2019 annual population estimate to 3,565,287.18 As in many other states, Connecticut saw a steady increase of retirement age population, while the school age population (those below 25) and working age population (25-64) each experienced small but steady decreases.
What do these demographic shifts mean for Connecticut? The overall population changes affect consumer demand and overall economic potential. In addition, the large generation of Baby Boomers continuing to retire and the next generation of Gen Xers being a smaller age group will further reduce the overall level of economic demand and output. This shift in demand should eventually be mitigated by the larger Millennial generation coming up behind Gen X, but in the mid-term, there could be a dip in the amount of gross domestic product produced in the state.
Prior to the last recession in 2008-2010, population in Connecticut was generally increasing because of positive natural changes (there were more births than deaths) and net domestic migration (people leaving for other states) was roughly offset by net international migration (people moving in from other countries). However, after the recession ended, the number of births decreased so the natural change in population has a much slimmer positive margin. Most recently, more children (age 17 and under) and working-age residents are moving to Connecticut than are leaving. However, more college-age and retirement-age residents are leaving than are moving to Connecticut.
Disruptions from technological advances and other factors will continue to present both challenges and opportunities for companies, particularly in the state’s traded industries that employ substantial shares of workers and bring in dollars from out of state. How well these sectors capitalize on these disruptions and boost their growth will have a large impact on the state’s economy in 2020 and beyond. The state and municipal governments should consider these factors as they consider how to best support the state’s long-term economic growth.
Alissa K. DeJonge is Vice President of Research at the Connecticut Economic Resource Center, Inc. This is a slightly abridged version of an article that first appeared in the January 2020 issue of The Connecticut Economic Digest, a joint publication of the Connecticut Department of Labor and the Department of Economic and Community Development. DeJonge expresses appreciation to Rachel Gretencord, CERC’s Financial and Research Analyst, for her research contribution.
