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Connecticut Economic Digest: January 1999 issue
1999 Economy Will Slow, But Continue To Grow | Industry Clusters | Housing Update | The Minimum Wage Debate: The Latest Rounds | Looking Up: Most Recent Numbers Provide Positive Signals

1999 Economy Will Slow, But Continue To Grow (Jan 99 article)
By Mark R. Prisloe, Associate Economist

Economic growth in the State will slow, but continue to grow according to the most recent projections for the year ahead. While the possibility of any very strong 1999 economic outlook has been somewhat tempered by volatile domestic and world events, no recession is foreseen. Connecticut's economy is still poised to see growth in employment, housing permits, retail sales, income, and gross state product (GSP).

Positive Consensus

A consensus of several recent forecasts provides evidence for this positive outlook. Meeting on November 20, 1998, the Connecticut Economic Conference Board (CECB) reviewed three forecasts. A proprietary outlook prepared semi-annually for a business, academic, and government consortium of the six New England states known as the New England Economic Project was presented by Fairfield University Economics Professor Dr. Edward J. Deak. According to his forecast, employment will be up by 2,000 in 1999, well below the employment growth last year.

Presenting for the University of Connecticut's Connecticut Center for Economic Analysis (CCEA), Managing Editor of The Connecticut Economy Steven P. Lanza noted a slowing detected by the CCEA's leading and coincident indexes of employment. Finally, Ed Guay, Wintonbury Risk Management, cautioned about certain risks to Connecticut associated with national and world events. In a straw poll at the November meeting of the Hartford Area Business Economists (HABE), opinions ranged from "ebullient" optimism to "sustained slow growth," but none were forecasting a downturn.

Growth Indicators

Employment growth in Connecticut over the twelve months to October 1998 increased 1.4 percent, by 22,200 to 1,649,400. While slower than the national employment growth rate of 2.3 percent for the same period, the employment expansion is projected to continue. Moreover, a drop in the unemployment rate to 3.8 percent in October put Connecticut's unemployment rate a full percentage point below its level a year ago and well below the 28-year low of 4.4 percent for the U.S..

Connecticut retail sales growth, as reported in this column last month, was higher than the nation's in 1996 and 1997. Data through September indicated year-to-date retail sales at $27.17 billion, up 6.7 percent from year-to-date sales for the same period a year ago. (See "Business Activity," p. 7.) Few risks were evidenced by an apparently busy fourth quarter, likely making 1998 another consecutive positive year in the closely watched retail sector. The accompanying growth in sales tax receipts, up 5.8 percent for the year through October, provided additional confirmation of the strength of consumer spending.

Housing permits were also among the positive indicators. Through October 1998, the year-to-date permits were up 21.9 percent to 9,595 from the 7,871 units authorized through the same period last year. In October 1998 alone, authorized housing units increased by 20.3 percent to 1,025 from the 852 units authorized for October 1997.

The Labor Department's forecasted first quarter 1999 increase of 4.6 percent in personal income from the first quarter a year ago also points in a positive direction. The NEEP forecast also projects an increase in "real" (adjusted-for-inflation) personal income of 2.0 percent for all of 1999.

Finally, the real Gross State Product (GSP) is projected to increase from $121 billion to $122 billion in 1999, a growth rate of about 1.0 percent in 1999, compared with the estimated increase of 2.7 percent in real GSP for last year according to the NEEP report. GSP is the total dollar value of final goods and services produced in the State.

Risks To The Outlook

Among the risks to this outlook are a few world and national developments. U.S. exports through the third quarter, for example, were down 1.1 percent. Yet, Connecticut exports rose 7.2 percent even as the State's exports to Asian destinations fell 11.4 percent. An encouraging sign of the strength of Connecticut's overall export performance was an increase of 7.0 percent in exports to Connecticut's top ten trading partners (including Canada, Germany, France, and Taiwan) through the third quarter from the same period a year ago.

Among technical indicators of possible trouble ahead is the December-reported decline for a fourth consecutive month in the Connecticut leading employment index developed by the University of Connecticut's Connecticut Center for Economic Analysis (See p. 5). The leading index, a barometer of future employment activity, fell in September to a level not seen since November 1995.

Finally, to the extent that consumer confidence determines future spending behavior and therefore future economic activity, it should be noted that the consumer confidence index for both the U.S. and New England were down 4.9 percent and 14.2 percent, respectively, as of October. (See p. 8 for current levels.) Likewise, in polling conducted in early October by the Center for Survey Research and Analysis at the University of Connecticut, consumer expectations for future economic activity dropped dramatically from 117.7 to 79.6, the sharpest quarterly decline in expectations since the measurement began in 1992.

In summary, the Connecticut economy, different today than it was even ten years ago, is likely to weather these otherwise challenging circumstances looming on the horizon. Based on the indicators and sound fundamentals, continued, if slower, growth is expected in 1999.

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Industry Clusters
Progress Reported

A new "Industry Cluster Progress Report," released in October 1998, represents the first interim report since last February when the leadership of the industry cluster advisory boards presented their Partnership for Growth report to the Governor and legislators. Within that original report, a series of recommendations were proposed intended to "enhance the ability of Connecticut's businesses and citizens to compete more effectively as we enter the 21st century." The latest report describes progress being made in implementing these recommendations.

In the closing days of the 1998 legislative session, the Governor and Legislature unanimously approved the "Cluster Bill" and the financial support needed to launch a major industry cluster initiative in Connecticut. Those funds became available in July 1998.

Among the progress reported, the Governor has approved the Executive Order that establishes a "Governor's Council on Economic Competitiveness and Technology" that will be cochaired by the Governor and a business leader. The Council will consist of: (1) about 45 Chief Executive Officers (CEOs) from a cross-section of industries throughout the State, large and small; (2) legislative leaders; (3) heads of key educational institutions; (4) labor representatives; (5) officials of important associations; and (6) several Commissioners. The Council's first meeting was to be held in December.

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Housing Update
November Housing Permits Up 45.6%

Commissioner James F. Abromaitis of the Connecticut Department of Economic and Community Development announced that Connecticut communities authorized 817 new housing units in November 1998, a 45.6 percent increase compared to November of 1997 when 561 were authorized.

The Department further indicated that the 817 units permitted in November 1998 represent a decrease of 20.3 percent from the 1,025 units permitted in October 1998. The year-to-date permits are up 23.5 percent, from 8,432 through November 1997, to 10,412 through November 1998.

"The Connecticut housing market is enjoying its greatest strength in a decade," Commissioner Abromaitis said.

"The number of new starts in Bridgeport has nearly doubled over the past year and permits are up in Hartford, New Haven, and Waterbury."

Reports from municipal officials throughout the state indicate that Tolland County with 113.5 percent showed the greatest percentage increase in November compared to the same month a year ago. Hartford County followed with a 68.5 percent increase.

Hartford County documented the largest number of new, authorized units in November with 219. Fairfield County followed with 159 units and New Haven County had 131 units. Farmington led all Connecticut communities with 46 units, followed by Ellington with 28 and Manchester with 26.

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The Minimum Wage Debate: The Latest Rounds
By Daniel W. Kennedy, Ph.D., Associate Economist

As a result of Connecticut's new minimum wage law, the State's minimum wage will rise to $5.65 per hour on January 1, 1999, and to $6.15 per hour on January 1, 2000 (or to a value that is indexed to the Federal minimum wage, whichever is greater).

Connecticut has not been the only jurisdiction in recent years to take this action. For example, on November 3, 1998, Washington State voters approved the first minimum wage indexed to inflation. At the Federal level, the 1996 amendment to the Fair Labor Standards Act increased the minimum wage to $5.15 per hour on September 1, 1997. However, this may be the last Federal increase for a while. In September 1998, the Senate voted to block a Federal increase in the minimum wage which would have raised it to $6.15 in two increments.

Until recently, there had been a long-standing consensus among mainstream economists that increases in the minimum wage caused employment reductions in covered industries. That consensus changed with the publication of new research by David Card and Alan Krueger in 1995. Since all the issues surrounding the minimum wage cannot be covered in one article, what follows is a brief discussion of several selected areas of disagreement among economists that highlight their different opinions about the effects of the minimum wage.

The Causes Of Unemployment

Keynesians believe that unemployment arises when the level of income in the economy is not sufficient to absorb the current level of output. It is the result of fluctuations in economic activity over the business cycle, or an inadequate growth rate. They focus on the level of aggregate demand as the principal cause of unemployment, with wages playing a secondary role. Neoclassical economists argue that unemployment is the result of the wage rate being set or stuck above that which would be obtained by the interaction of supply and demand for labor in the labor market. This causes the supply of labor to exceed the demand for labor (i.e., there is a labor surplus, or unemployment.) Structuralists maintain that unemployment is caused by a mismatch between available jobs and available workers. It results from structural factors (such as industry, occupational, or geographic immobility that can result from job search and relocation costs) that impede the job matching process. Removing these impediments would reduce unemployment.

Since Keynesians view the wage as playing a secondary role to other factors, the minimum wage is not considered a critical determinant of employment. Structuralists look more to increased labor mobility, in both the geographic and occupational sense, than to the wage as a determinant of employment. It is the Neoclassical economists that view the wage as the primary determinant of employment. To them, a minimum wage, presumably above that determined by the market, will lead to reductions in employment.

The Responsiveness Of Labor Demand To A Wage Change

There is disagreement among economists over the response of labor demand to a given minimum wage increase. The Big Responders contend that there will be a large relative reduction in employment for a given percent increase in the minimum wage. The Small Responders argue that the response will be small and likely to be statistically undetectable.

Theories Of Market Structure

There are two models of market structure that can be thought of as being at opposite poles. These two templates are the most frequently used to study the effects of policy. Under Perfect Competition, there are many sellers and many buyers of labor services in the labor market. No one participant is large enough to affect the wage rate. Under Monopsony, there is only one buyer of labor services in the labor market. This single buyer has some latitude in setting the wage rate. Further, the wage rate and the level of employment are lower than they would be under perfect competition.

If the sectors subject to the minimum wage most closely resemble perfect competition, the minimum wage will result in job loses. If the sectors covered resemble monopsony, then the minimum wage will not necessarily lead to job losses.

The Controversy Over Recent Findings

In Myth and Measurement, David Card and Alan Krueger state that they found no evidence of any of the job losses often believed to be associated with either Federal or state minimum wage increases. Their observations were based on their review of previous work, as well as their own studies. They found their results difficult to reconcile with the assumption that covered sectors approximate the perfect competition model. Their findings have economists and policymakers debating and rethinking the conventional assumptions about the effects of the minimum wage.

What Can We Conclude?

In light of the issues discussed here, what is to be concluded about the prudence of raising the minimum wage? Clearly, a large enough increase in the minimum wage would result in job losses in the covered sectors. Since 1954, the historical record for the U.S. indicates that the Federal minimum wage has seen, for the most part, small to moderate increases that are far from what could be considered excessive. In 1996 dollars, the Federal minimum peaked at $7.21 an hour in 1969 and has declined ever since. It was $4.75 in 1996 (in 1996 dollars). In conclusion, the evidence indicates that moderate increases in the minimum wage probably do not reduce employment and serve to raise the wage of those covered. This would especially pertain in times of economic expansion.

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Looking Up: Most Recent Numbers Provide Positive Signals

The Connecticut coincident and leading employment indexes both rebounded from previous months' declines with the release of (preliminary) October data. The coincident index recovered most of its September fall after reaching new peaks in June, July, and August. The coincident index now lies just below its August peak and just above its peaks in June and July. The leading index rose after falling for four consecutive months and now lies above its August and September levels and within range of its previous peak in February. As noted last month, the August and September retrenchment in the leading index probably reflected in large measure the GM and SNET strikes. As such, there is still considerable uncertainty about what the recent movements in the leading index imply. We shall carefully monitor future data releases to identify, if and when, the leading index signals an impending downturn in the Connecticut economy.

The future of the Connecticut economy's current expansion, as noted before in this column, hinges critically on the continuation of the U.S. expansion. That is, the Connecticut expansion will not long survive once the national economy heads south. In addition, the continued expansion of the U.S. economy may require policy changes in the U.S. and/or in the world. First, the Federal Reserve has already lowered market interest rates three times in recent months and is unlikely to lower rates again, unless serious signs of weakening in the national economy emerge. Second, the European countries led by the German Bundesbank recently sent a strong signal by engineering a coordinated cut in interest rates to boost their economies. Finally, analysts cannot predict with any confidence the effects of the "Asian contagion" on the U.S. or world economies. Analysts do agree, however, that Japan needs to develop a credible plan to address the serious problems in its economy, otherwise the "Asian flu" will continue to haunt the world's economies.

In summary, the coincident employment index rose from 91.4 in October 1997 to 95.7 in October 1998. All four index components, once again, point in a positive direction on a year-over-year basis with higher nonfarm employment, higher total employment, a lower insured unemployment rate, and a lower total unemployment rate.

The leading employment index increased from 89.9 in October 1997 to 90.4 in October 1998. Four of the five index components sent positive signals on a yearover- year basis with a lower shortduration (less than 15 weeks) unemployment rate, a longer average work week of manufacturing production workers, lower initial claims for unemployment insurance, and higher total housing permits. The other component sent a negative signal on a yearover- year basis with lower Hartford help-wanted advertising.

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]. Kathryn E. Parr and Hulya Varol [(860) 486-3022, Storrs Campus] provided research support.

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Last Updated: October 15, 2002