Connecticut Employment Outlook to 2007
By Daniel W. Kennedy, Ph.D., Senior Economist, DOL

Connecticut's jobs recovery from the recent recession is now in its 11th quarter, while the U.S. recovery-expansion is in its 12th quarter. Connecticut's economy has created 28,800 net, new nonfarm jobs since the third quarter of 2003, compared to 39,700 new nonfarm jobs over the same time period after the end of the early 1990's recession. One difference between the two recoveries is the opening of the first of the tribal casinos after 1992. Some additional insights into the differences between the two recoveries are provided by Business Employment Dynamics (BED) data. These data cover private sector employment, which excludes the employment generated by the tribal nations, and for this analysis was only available up to the first half of 2005, or the first seven quarters of the current recovery (eight, counting the quarter in which the recovery began).

Table 1 compares the performance of selected labor market dynamics indicators over the recoveries that began in 1992:Q4 and 2003:Q3. It is clear that the Connecticut economy was going through a much more intense period of job reallocation during the 1992:Q4 recovery-expansion. Gross Job Creation (JC) averaged 8,000 jobs per quarter higher over 1992:Q4-1994:Q3 compared with the 2003:Q3 to 2005:Q2 period. However, gross Job Destruction (JD) was also higher during the 1990's recovery-expansion. Connecticut's economy eliminated 8,000 jobs per quarter more than were destroyed during the first seven quarters of the current recovery.

SOURCE: Connecticut Department of Labor, Office of Research
*NEG = JC - JD

The sum of job creation and job destruction yields Job Reallocation (JR), which provides an indicator of the intensity of job churning in the economy. The intense job churning in the 1990's, of course, reflects the recession and convulsive restructuring that hit the State's economy during that time. The 1992:Q4 upturn, on average, reallocated 16,500 more jobs each quarter than the current recovery. One interesting note: when confined to private employment, the current recovery actually averaged a net employment growth of 187 jobs per quarter higher than the 1992:Q4 recovery.

Connecticut's Job Growth Performance: 2001-2005

Graph 1 depicts the change in nonfarm employment over three two-year periods, broken out by the goods-producing and service-providing segments of the economy. The first of these covers the major part of the recent recession. The second encompasses the recovery to the end of 2005. The last is what is currently expected through the end of 2007.

The Last Recession: 2001-2003

Between 2001:Q4 and 2003:Q4, Connecticut nonfarm employment declined by 38,900, or 2.3%. Seventy-one percent of the decline, 25,300 jobs, came from losses in the goods-producing segment of the economy, with ninety-three percent of those accounted for by the manufacturing sector (see Table 2). This reflects the severe retrenchment in manufacturing employment at the national level as the 2001 recession unfolded, following the winding down of the Y2K fix, a series of interest rate and oil price hikes, the popping of the investment/Dot-com and stock market bubbles, the corporate scandals, and the September 11th attacks. However, the service-providing segment of Connecticut's economy also had a net loss of 9,600 jobs between 2001:Q4 and 2003:Q4.

Recovery: 2003-2005

The 2003:Q4-2005:Q4 period contains most of the current recovery, which began in the third quarter of 2003. Over that two-year period, Connecticut nonfarm employment recovered some of its losses from the previous recession with a net increase of 23,600 jobs, which represents a 1.4% growth rate. With a slight decline of 200 jobs in the goods-producing segment, virtually all of the employment growth came from the service-providing segment of Connecticut's economy. The number of industry sectors with net job gains over the recovery period more than doubled from five to 12. Six of these sectors contributed 2,000 jobs or more each to net growth. Riding strong trend-effects driven by demographics, with a reinforcing boost from the cyclical upturn, the health care and social assistance industry was the major contributor to the State's job growth.

Employment Outlook: 2005-2007

The forecast for the 2005-2007 horizon assumes that the current national recovery-expansion will proceed at a weaker pace, punctuated by ups and downs, for the rest of 2006, after receiving a temporary boost from a warm January in the first quarter. The economy is expected to return to the weakness that surfaced in late 2005 by early 2007, possibly earlier. This outlook is predicated on the continuing and intensifying effects of persistent drag forces on the economy's momentum. In addition, the slowing of housing will dampen the multiplier effects generated by strong housing market activity. Since Connecticut's economic downturns tend to precede U.S. economic downturns, the State's employment would likely decline at least one quarter before the onset of a national slowdown, or outright recession.

On an annualized basis, the forecast calls for a slight slowing in the annualized growth in jobs for 2006, with the State's economy adding a more modest 11,000 jobs. It is expected that employment will then show little change in 2007, possibly declining by as many as 3,000 jobs.

After adding 23,600 net, new jobs over the 2003:Q4-2005:Q4 recovery period, Connecticut's economy is expected to add another 14,500 new jobs between 2005:Q4 and 2007:Q4. Most of the new jobs will be added between the fourth quarter of 2005 and the fourth quarter of 2006. Little, if any, net new employment growth is expected to occur between 2006:Q4 and 2007:Q4. With expected flat employment in the goods-producing segment, virtually all employment growth over the eight-quarter forecast horizon will come from the service-providing segment of the State's economy.

The Connecticut employment forecast projects that 10 industry sectors will create 22,853 net, new jobs (not shown in Table 2), and that five sectors will add 2,000 or more new jobs each, over the 2005:Q4-2007:Q4 forecast period. The continuing and intensifying trend-effects, driven by demographic forces, once again puts health care and social assistance at the head of the pack in creating new jobs, and is expected to account for one-quarter of total new jobs through the end of 2007. Lifestyle and tribal expansions are expected to result in new jobs created in accommodation and food services. Educational services employment is expected to increase; however, Connecticut's school-age cohort is expected to begin to decline in numbers at the end of the forecast horizon. Also expected to add jobs are administrative and support services, and construction, especially non-residential construction.

Nine of Connecticut's industry sectors are projected to have net declines totaling 8,580 jobs over the eight-quarter forecast horizon (not shown in Table 2). Three sectors are expected to lose 1,000 or more jobs each. Manufacturing job losses should mostly come from non-durable goods industries, as consumers continue to increase their share of services consumption at the expense of consuming non-durable goods. However, a severe recession, or a new wave cost of pressures, or losses of critical contracts in the durable goods industries could increase manufacturing's job losses by 10 times the amount forecasted. Driven by reorganizations, wireless and broadband communications advancements, and mergers and acquisitions, the management of companies and enterprises sector is expected to continue to eliminate redundant positions over the forecast period. The information sector, continuing its downsizing trend, is also expected to see a net decline in its employment.

Momentum, Jump-Starts, Drag Forces, and Wild Cards

As mentioned above, the forecast is predicated on certain assumptions. If they do not pan out, the forecast will diverge from the actual outcome. Two types of risks can derail the forecast: economic and non-economic. Major considerations that present economic-based risks to the forecast can be framed in terms of momentum, jump-starts, drag forces, and wild cards.

Momentum, in this context, refers to how resistant the economy is to drag forces that introduce or intensify frictions that impede the economy's forward progress, or to wild cards (or shocks), which, whether economic or non-economic, are events that cause unanticipated sudden declines in critical economic activities or sectors, or both. There are two economic drag forces that could overcome the momentum of the current recovery. The two culprits are oil price increases, and the new higher sustained floor under those prices, and the Fed's recent string of interest rate hikes and now rising long-term rates. Based on the length of the average post-1975 recovery-expansion, the current cycle's peak would be sometime in the beginning of 2008. But if these two economic drag forces stop the forward momentum of the economy, then this upturn could very well peak sometime in 2006 or early 2007. This scenario is built into the forecast. If the economy's momentum is such that it resists these drag forces, then the forecast will be overly pessimistic. Further, being an election year, the party in power usually tends to "jump-start" the economy. Of course, as the 1960, 1980, 1982, and 1992 election seasons have shown, the economy does not always cooperate.

Unlike drag forces that slowly build up enough friction to bring an expansion to a halt, wild cards usually abruptly cut it short. Housing has both drag force and wild card aspects to it. The drag force part of the slowing housing market is not only the direct effects on spending, but also the dampening of the multiplier effects associated with robust housing market activity. However, an abrupt drop in housing activity would have more of a wild card effect, especially due to the connection between housing price appreciation and consumption growth over this recovery since it was largely credit-financed, principally, by homeowners tapping into increases in housing wealth. With a cooling housing market and significant household debt loads (especially among those below the median income level), the economy would take a significant hit from a major retrenchment in consumer spending, coupled with an increase in non-performing loans, or outright widespread defaults, or both.

Two connected possible wild cards are the Federal deficit and the Current Account deficit. U.S. consumers, in conjunction with inadequate savings, have been borrowing from the rest of the world to finance spending that has exceeded what is being domestically produced. If the rest of the world stops extending credit to U.S. households, businesses, and the Federal Government, then a severe global adjustment could ensue. In that case, the forecast would be wildly optimistic.

Finally, some geopolitical wild cards that loom large are Iraq's disintegration into total civil war, or U.S. military action in Iran, or both. Such developments, in conjunction with instability and nationalizations in other oil-producing countries, in the face of rapidly growing world demand, could produce an immediate interruption in oil supplies, possibly producing severe price spikes and crippling the world's economies.

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