Connecticut's personal income growth in 2012 was the second worst in the nation, behind only an agriculture state in the middle of a drought.
"A lot of the economy depends on that personal income growth," said Pete Gioia, vice president and economist for the Connecticut Business & Industry Association. "It is really hard for your (gross domestic product) or your (gross state product) to exceed personal income growth."
The state's personal income total among all residents grew 2 percent to $211.5 billion in 2012, according to the U.S. Bureau of Economic Analysis. That growth ranked 49th in the United States, behind only South Dakota's negative growth of 0.2 percent, largely driven by the loss of farm income caused by the extended Great Plains drought for the last two years.
"It indicates Connecticut has taken some hit in key industries, including manufacturing and finance," said Steven Lanza, executive editor of The Connecticut Economy at the University of Connecticut.
Connecticut's poor performance was driven by the problems of the finance and insurance industries, which are still recovering from the recession that started in 2007. The BEA data showed income growth in all Connecticut industries lagged behind the national average for those industries, but the finance and insurance sector had the biggest gap between the state segment and the national average.
"Finance makes up a very, very large share of aggregate earnings in Connecticut," said Matthew von Kerczek, economist of the Bureau of Economic Analysis. "Finance was one of the few industries that declined nationally in 2012."
The Connecticut finance picture would have been even worse had it not been for the tax law changes on dividend income. In 2013, the tax rate on dividends for those with more than $400,000 of taxable income increased from 15 to 20 percent, causing many companies to pay out early dividends in the fourth quarter 2012.
That dividend boost actually made Connecticut the third highest state for personal income growth between the third and fourth quarters, but those dividend payouts don't equate to a healthy finance and insurance industry, said von Kerczek.
The number of job openings in the Connecticut finance and insurance sector has decreased about 35 percent from June 2008 levels and total industry payroll is down about 10 percent, according to the Connecticut Insurance & Financial Services Cluster analysis of 49 key industry companies.
"While we have recovered some of those steep losses from when there were — no job postings a couple of years ago and we are seeing some partly return — we are not back to the same levels as they have had in the past," said Susan Winkler, IFS Cluster executive director.
In talking to several key companies in the state, Winkler said the financial and insurance industry should have more job postings in the coming quarters, which, in turn, will help personal income growth.
"We are headed toward the economic recovery," Winkler said.
Besides finance and insurance, nearly every other Connecticut industry was below the national average in personal income growth, including manufacturing, state and local government, health care, construction, retail, and professional services.
The only three industries above the national average were company management, educational services, and agriculture.
"The numbers on this are a bit disappointing, but it is not entirely a Connecticut-specific phenomenon," Lanza said. "This entire area of the country performed poorly."
Of all the Northeast states, only Vermont was in the upper half of the national rankings at No. 24, but even that state's personal income growth of 3.4 percent is below the national average of 3.5 percent.
The remaining Northeast states are all ranked near the bottom of the nation — New York (ranked No. 45), Rhode Island (No. 44), New Hampshire (39), New Jersey (38), Maine (32), Massachusetts (30), and Pennsylvania (27).
The New England personal income growth average was 2.8 percent, worst of the eight national regions.
Connecticut and the rest of the region need to create jobs to reduce the long unemployment backlog, in order to raise personal incomes, Gioia said.
Without personal income growth, the economy will continue to languish, particularly in retail, restaurants, and other parts of the service industry, although nearly all industries are reliant to a certain degree on disposable income, Gioia said.
"Ultimately, everything gets consumed by somebody," Gioia said. "Consumer spending drives the economy."
The poor 2012 report doesn't portend well for Connecticut in its current negotiations for the state budget that must be approved by July 1, Gioia said. The proposed budget is dependent on 5 percent personal income growth, well above the state average of 2 percent and even the national average of 3.5 percent.
"Two percent personal income growth is pretty weak," Gioia said.
Despite the poor growth in personal income, Connecticut still has the highest per capita personal income in the nation — $58,908.
States with higher personal income tend to have slower growth in that metric than states with lower personal incomes, Lanza pointed out.
"It is not as though the economy in Connecticut is going to hell in a hand basket," Lanza said. "Higher income states tend to be better educated and have a higher quality of life."