Information Technology Helps Pace Job Growth
By Lincoln S. Dyer, Economist

The "Land of Steady Habits" is progressively embracing the productivity enhancement and cost containment properties of the "information technology revolution." This fundamental shift in the economy toward high technology processes is materially lifting output of goods and services while garnering efficiencies and, in due course, forcing greater competition in the marketplace. IT and its rapidly changing attributes have unleashed fresh growth prospects for the state of Connecticut and are re-energizing all of America.

The Info-Tech Within

Information technology is a supporting industry that penetrates all aspects of the economy and is characterized by rapidly changing technology, frequent new product introductions, increasing automation, evolving industry standards, instantaneous information flows, and broadening disintermediation (cutting out of the middleman). It could be argued that information technology is currently providing a "positive supply shock" or "upside growth catalyst" to the country's economy and is transforming the way many things are accomplished by providing better mobility of ideas and capital. This affirmative supply shock is also currently modifying the output-inflation trade-off in the economy for the better. It is also assisting the state of Connecticut in restructuring its industrial makeup with a more suitable balance. The Baby Boomers may have some far-reaching implications for the economy, but the information technology industries and the internet economy are surely the synergists of the present growth as we prepare for the next millennium.

PRIVATE SECTOR INFORMATION TECHNOLOGY PRODUCING INDUSTRIES

Speed Limit has been Raised

While most economic observers are still considering Connecticut's growth prospects in the more methodic 55-MPH confines, it is conspicuous that the new 65-MPH growth potential of our economy has not fully sunk in. While the evidence of the emerging digital way of life is readily apparent in the big picture, it can be sometimes hard to document and analyze. Some think this new economy is starting to come into view, however. The Federal Reserve Board Chairman has acknowledged as much: "The newest innovations, which we label information technologies, have begun to alter the manner in which we do business and create value, often in ways not readily foreseeable five years ago." Better flows of information and capital are enabling globalization and providing more accurate pricing information coupled with a convergence of technological breakthroughs that have boosted productivity - perhaps permanently. Is this the "the productivity dividend" - a higher sustainable rate of economic growth without significant inflation pressures?

This appealing outlook could conceivably intensify as firms respond to their current limited pricing power by investing even more in technological innovation to boost productivity, which in-turn acts as more stimulus to the economy. With little pricing power, companies have to become more efficient to bolster the bottom line. It has been recognized that as much as 50 percent of all new expenditures on capital equipment are now concentrated in the information technology segment.

IT Paradox - "The Yearn to Churn"

This wide and powerful integration of computer hardware and software products and services with communications equipment and services into one dynamic market force has outrun typical market logic. The fits and bursts of growth instigated by information technology producing industries are very difficult to ascertain and forecast. This is part of the IT paradox. Successful information technology producing industries attract new capital and employment growth with technological advances, although it is obvious that these perpetual breakthroughs also coincide with some adaptation of obsolescence for existing equipment and service. Bear in mind, information technology is best utilized as a complement to labor allowing efficiencies and creativity, but it also can be a direct substitute for labor, causing sweeping job dislocations and corporate restructuring. This "churning" phenomenon is readily measurable in the employment counts of the information technology producing industries identified by the U.S. Department of Commerce. One easily discernible example of this would be the decline in the early-to-mid 1990's of the impact of the mainframe computer hardware sub-group while software and services grew very swiftly. While information technology is being rapidly diffused throughout the economy bolstering almost all industries, core information technology producing industries are defined as the actual producers of computer hardware and software and services, communications equipment and services, and instruments. (See table opposite)

Four on the Floor

Information technology producing industries are broken down into four sub-categories: hardware; software and services; communications equipment; and communications services. These higher paying industries are really instigating an economic reformation by steadily increasing value-added-per-worker across many other sectors and providing synergies among industries that may have not existed before. They especially enhance Connecticut's economic infrastructure as Connecticut is considered a heavy user of information technology based on its current industrial makeup. The State has a high proportion of employment in industry segments like insurance, money management, pharmaceutical research and healthcare, advertising, wholesale and retail trade, and production design - industries that have all thrived from technological enhancement. With an augmented value-added-per-worker, we can preserve our national lead in higher salaries and incomes.

Connecticut Benefits and Grasps New Growth Domain

Information technology producing industry employment in Connecticut has grown at a better than twenty percent rate over the last five years, outpacing the overall Statewide nonfarm employment growth rate since 1994 by over three times. Growth in information technology producing jobs in 1998 would have been stronger, but a major communications strike lowered growth by about 500 positions. In the first quarter of 1999, job gains continued in the information technology producing sector at close to the annual four-percent pace set in the last five years.

Changing Emphasis

Sustained job demand in information technology has pushed the average annualized wage paid in the first quarter in that grouping to an estimated $68,146 compared to the $40,926 annualized average for the State's. Software and services components have provided the majority of job growth in the information technology arena over the last five years (due to Y2K preparation), followed by the communications services segment that has benefited from the rise of the internet and telecommunications deregulation. The hardware components of information technology, which mostly fall in the manufacturing division, have had a decline in jobs, but at a lower rate than some production industries that were defense-related. Communications equipment aggregates had risen at a swift pace in the mid-1990's, but fell over the last year or so as some companies cut their payrolls, partly due to the Asian crisis which caused greater export competition.

Information technology producing industries have still grown quite impressively considering the "creative destruction" that goes on in their ranks. While one component of IT is growing, another is either getting priced out of the market, automated out of existence, or becoming obsolete.

Information technology is comparable in some ways to the construction division of the State. Both support a similar number of jobs in the State, both are experiencing labor shortages and booming demand, both are high-paying sectors, both are large areas for capital spending, and both supply strong earnings and employment multipliers or "ripple effects" to other sectors of the State's economy. The difference comes in the fact that one sector is more physical and product-based while the other is mostly service-oriented and knowledge-based.

The distinct emergence and growth of information technology may balance some future downturn from another high multiplier sector such as construction. However, positive aspects of any industry could eventually reverse and cause multiplying downside effects to the economy as well. Incidentally, more emphasis will be put on tracking these information technology sub-sectors in the upcoming release of the new North American Industry Classification System (NAICS).

Technological Boundaries

Inevitably some technological boundaries will be reached: Moore's Law (the doubling of computer processing capacity over each new product cycle or about 18 months) will not hold up forever and computing productivity cannot increase indefinitely. An economy also needs strong production growth (higher output) to keep up healthy productivity gains and we are quite far along in the business cycle to continue such strong gains. Hopefully, though, productivity gains will stay above the rate of wage increases, therefore limiting inflation's re-emergence.

Dividend Boost?

The "productivity dividend" concept is itself still being debated. Questions on the benefits of billions of dollars spent on Y2K (not much net dividend when it has to be spent on fixing transitory problems) and the costs of the learning curves associated with new technology are difficult to answer. But corporate Y2K spending in most cases results in system upgrades that really could provide exponential economic payback in the near future. It also now seems apparent that the Internet economy and E-commerce will pick up the baton as Y2K worries soften, and this should continue to sustain the substantial impact that information technology has had on the business cycle. According to the U.S. Department of Commerce, "Beginning in 1994, ... the IT sector contributed twice its share of the economy to overall nominal economic growth." Hopefully this continues and, combined with other high-tech initiatives, Connecticut embraces the knowledge-based economy and cultivates more diverse, high-multiplier industry segments that spread economic benefits to all citizens of the State.

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Industry Clusters
Q2 YTD Exports Even

Connecticut's merchandise exports for the year-to-date through the month of June kept an even pace with the same period last year, the Industry Cluster/International Division announced. Total exports of $3.8 billion matched last year's figure. U.S. exports through the second quarter were down 1.6 percent. New England exports, as a whole were up 3.6 percent for the same period.

Connecticut's largest export industry, transportation equipment, was up 14.6 percent, ahead of last year's 13.7 percent. Increases were observed in industrial machinery including computer equipment, up 0.4 percent, and fabricated metal products, up 10.7 per-cent. In addition, among Connecticut's five largest exports for the period were: instruments, $464 million; electronic equipment, $283 million; and chemicals and allied products, $272 million.

The State's largest trading partners for the period were Canada, France, Japan, Korea, and the United Kingdom. Rounding out the top ten were Germany, Mexico, Turkey, Taiwan, and the Netherlands. The single largest increases through the second quarter were with Turkey, Korea, and France.

Among all states Connecticut ranked 24th in the volume of its merchandise exports, ahead of all but Massachusetts in New England. Connecticut's growth exceeded that of New York, down 7.5 percent; Pennsylvania, down 2.9 percent; and New Jersey, down 5.1 percent.

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Housing Update
August Housing Permits Up 1.4%

Commissioner James F. Abromaitis of the Connecticut Department of Economic and Community Development announced that Connecticut communities authorized 991 new housing units in August 1999, a 1.5 percent increase compared to August of 1998 when 976 were authorized.

The Department further indicated that the 991 units permitted in August 1999 represent an increase of 1.4 percent from the 977 units permitted in July 1999. The year-to-date permits are down 1.4 percent, from 7,586 through August 1998, to 7,482 through August 1999.

"Permits activity for 1999 continues to keep pace with 1998, which was the highest level in the last ten years," Commissioner Abromaitis said.

Reports from municipal officials throughout the state indicate that New Haven County with 40.1 percent showed the greatest percentage increase in August compared to the same month a year ago. Middlesex County followed with a 36.2 percent increase.

Fairfield County documented the largest number of new, authorized units in August with 232. New Haven County followed with 206 units and Fairfield County had 205 units. Danbury led all Connecticut communities with 67 units, followed by Hamden with 40 and Stamford with 33.

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Coincident Index Surges; Leading Index Drifts

The Connecticut coincident employment index jumped to a new peak in the current expansion with the release of (preliminary) July data. The Connecticut leading employment index continued to drift, increasing just slightly in July.

The coincident index, a gauge of current employment activity, rose to a level not seen since November 1989, near the peak the 1980s expansion. The current expansion has encompassed several phases. The economy experienced lackluster growth from 1992 to 1995 as seen in the accompanying chart. Then between 1996 and 1998 the economy's growth accelerated and the movement in the coincident index mirrored its movements in past expansions. Finally, in 1999, the coincident index slowed considerably, but nevertheless, just noted, now stands at its peak in the current expansion.

The leading index, a barometer of future employment activity, has bounced around considerably during the last several years. As the accompanying chart reveals, the leading index rose steadily, albeit with some volatility, during the initial phase of the current expansion. Since late 1996 and early 1997, however, it has remained in the neighborhood of current level. The leading index's signal light definitely began flashing yellow a few years ago. We continue to monitor the leading index's signal light for its next change to green or red.

The July data continue to document the unusual event noted in last month's column - total employment falls below nonfarm employment, now by a larger amount. These two series are developed from different sources of information - the employer survey for nonfarm employment and the household survey for total employment. In addition, July's release saw a large drop in the total unemployment rate, also developed from the household survey, to 2.6 percent, a level that many analysts think may not stand up to future revisions in the data.

In summary, the coincident employment index rose from 97.8 in July 1998 to 100.2 in July 1999. Three components of the index point in a positive direction on a year-over-year basis with higher nonfarm employment, higher total employment, and a lower total unemployment rate. The other component points in a negative direction on a year-overyear basis with a higher insured unemployment rate.

The leading employment index fell from 90.9 in July 1998 to 89.9 in July 1999. Three index components sent negative signals on a year-over-year basis with lower Hartford help wanted advertising, a higher short-duration (less than 15 weeks) unemployment rate, and lower total housing permits. Two components sent positive signals on a year-over-year basis with lower initial claims for unemployment insurance, and a higher average workweek of manufacturing production workers.

SOURCE: Connecticut Center for or Economic Analysis, University of Connecticut. Developed by Pami Dua [Economic Cycle Research Institute; NY,NY] and Stephen M. Miller [(860) 486-3853, Storrs Campus]. Stan McMillen and Hulya Varol [(860) 486-3022, Storrs Campus] provided research support.

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