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The highly productive and high paying Finance, Insurance,
and Real Estate (FIRE) sector of commerce has helped configure Connecticut's
industrial composition at least since the early 1800's when the insurance industry
began to develop in Connecticut. Financial backing assembled from early poolings of
capital was undoubtedly behind many of the inventions and patents that Connecticut is
recognized for nurturing in the Industrial Revolution. Fittingly, the more things change,
the more they stay the same. Today, Connecticut, still well-heeled as insurance (Hartford)
and reinsurance (Stamford) regions for the country, and well-situated between the
financial center (New York City) of the world and the mutual fund hub (Boston) of the
United States, is still a place where good ideas can get to market with a little financial
spark.
Fire Storm
Looking back to the economic downturn in the early 1990's, the FIRE industries
were some of the main job losers in percentage and numerical terms. And despite entering a
new decade, Connecticut's FIRE division still has not restored all the jobs lost from
the nineties recession. FIRE sector employment actually had parallel job declines in the
early part of the 1990's defense-related slump, but then experienced significant job
losses until 1997 when it finally started to turn higher - nearly seven years later!
One of the main externalities, besides the banking and real estate crisis of the early
1990's, that caused this extended job loss in FIRE, was the $15-plus billion tab
afforded to the insurance industry from Hurricane Andrew in August 1992. This huge claim
led to massive restructuring of major multi-line insurers to restore profitability in a
signature industry just as Connecticut was emerging from the recession. This
reorganization caused downsizing and geographical disbursal within FIRE sectors and led to
fragmentation in the insurance industry that persists today. Insurance-related businesses
[Standard Industrial Classification (SIC) 63,64] contribute just over 50 percent of total
FIRE employment today in Connecticut, down from more than 56 percent in 1992.
One outcome of company restructuring from Hurricane Andrew and the banking decline was
the renewed agglomeration of the FIRE industry in the Fairfield County area. Insurance
carriers, bankers, and investors have instated more active management of their risk
exposure and capital float with reinsurance, database tools (HMO's), and other
financial instruments. In a global economy, a specialization in financial instruments like
derivatives and securitizations is not obscure but a realization that they are primary
tools for efficient risk and money management. Fairfield County has become a focal point
for investment instruments and money management needed in the financial world. More
efficient financial transactions cut costs and can unlock more value.
Thinking Globally, Relocating Locally
The Swiss Bank relocation to Stamford starting in September 1997, was really the key
impetus that got the FIRE division back in the job creating mode for Connecticut (Swiss
Bank is now UBS, with over 2,000 jobs in more investment-related units). The bull market
was in full run by this time, but it took this investment-banking move to sustain this
sector and extend a self-reinforcing dynamic for FIRE job growth. Additional company
migrations to Fairfield County to escape New York City taxes, plus the strength of capital
flows have reaffirmed valor for this division. Today, almost anything is traded on a
market including energy, commodities, currency, pollution credits, and even fiber optic
bandwidth. It took new investment deployment (global oriented) to turn FIRE jobs around in
Connecticut. Even the NASDAQ (Trumbull operations) is forging global alliances.
Investment-related industries (SIC 62) have added over 5,000 jobs since 1994.
Looking now to 2000, the FIRE industries continue to withstand transformations, yet
supply job growth for now. Inflationary concerns over skilled labor shortages and robust
consumer demand have prompted the Federal Reserve to increasingly tighten monetary policy.
Consequently, many core banking, mortgage, and insurance sectors are being constrained by
interest rate sensitivity and the market valuations of some Connecticut-based financial
companies have been lowered, prompting vulnerability to takeovers. Meanwhile, competition
in all financial realms continues to increase. In response, impressive spending on
technology in FIRE industries has made this sector the most productive in terms of dollar
output per employee of all industry divisions. Translation: FIRE is creating broadened
revenue streams with fewer workers (with upgraded skills) with assistance from ATM's
to electronic communication networks (ECN's). Technology investment can enhance
value-added measures, but can also make future job creation in FIRE a challenge if done
without seeking out new markets and areas of growth.
Spontaneous Combustion
Ongoing financial innovation may be the effective response to this formidable
job-creating task. How are companies stabilizing their exposure to rising interest rates
and oil prices? Savvy corporations are using energy futures and interest rate swaps. In
addition, the Internet is exerting market-altering forces everywhere. And look at all the
banks now in supermarkets and the proliferation of discount brokers. This so far has kept
our high industry concentration of FIRE employment intact meaning capital flows are
staying around. On average in 1999, Connecticut's FIRE division employment held a
1.4199 location quotient, meaning state employment in this sector holds an almost 42%
higher than national average employment concentration in FIRE industries. This was a full
percentage point higher than in 1998. So Connecticut's share of US FIRE jobs is
actually increasing after having declined from an incredible job concentration level of
1.5237 in 1990.
Nowadays, focusing on industry productivity growth is important; still, it is important
to highlight the adaptability and resiliency of the US financial markets and corporations
that succeed in these markets. Skillful management is crucial for positive change and for
effective implementation of technology. America's open, flexible, and transparent
form of democratic capitalism has shown to be advantageous for resourceful growth. The
point here: The structures of capital markets have changed. Companies are responding to
changing capital markets brought on by the rise of individual investors and deregulation.
The way companies respond to new trends or threats of competition results in the necessary
industry restructuring. Just look at management strategies executed by the full-service
brokerage firms as they have reorganized for the investor's on-line rush. The
"wealth effect" felt by Americans from investment gains has been increasing
consumer demand but has also increased investment as well, especially from the "baby
boomers", belying a shift in savings philosophy. Also, workers have had the
responsibility of retirement planning placed more into their own sphere of influence,
making more and cheaper estate and financial planning services invaluable. Companies are
responding and Connecticut has shown it can adapt.
Without some financial reform in the US, however, global players could be better
positioned than American counterparts to take advantage of financial globalization. The
recent repeal of Glass-Steagal security laws by Congress addresses this. Domestic
financial markets are not shielded anymore anyway, as foreign investors are prominent in
the US. In spite of that, many financial companies have already found ways around most of
the limitations set up by those Depression-era reforms to wield company strengths.
Connecticut is already headquarters for the world's largest non-bank financial entity
(GE Capital) and has a strong presence from the most global financial services corporation
that has bought an insurance powerhouse from Hartford (CitiGroup). These mature, advanced,
and powerful innovators have also set the stage for the FIRE division to regain momentum
in Connecticut.
Hedge Edge
All the while, other areas of growth have strengthened. Private hedge funds, with their
investments derived from wealthy sources and their reliance on newer financial
instruments, have heightened their presence with Greenwich having a collection of firms
called "Hedge Row". Long Term Capital Management not withstanding, most hedge
fund's main purpose is protecting wealthy investors from downside risk. Trust and
other private-equity services are expanding too. And many traditional insurance companies
now call themselves "financial services" companies and emphasize financial
products like annuities and mutual funds. Some banks, meanwhile, have centered on
fee-based services that are less cyclical to traditional business and have made forays
into other financial services (ex. buying insurance agencies) to increase cross-selling
abilities. Bank and other FIRE consolidation should persist, however, as it has in
Connecticut for over ten years. Technology implementation has instigated a lot of the
merger activity. Asset gathering and wealth management are now prime areas of growth for
all FIRE sectors. With an eye toward one-stop shopping, the distinct nature of business of
companies in FIRE is not so cut and dried anymore.
Investment Cycle
The blending of intellectual and financial capital goes well together making venture
capital another opportunity for future growth for the State, a kind of mutual development.
Connecticut has some very promising homegrown enterprises that are players in emerging
industries like internet-related sectors, human genome research, fuel cell technology, and
fiber optics. These areas may turn out to be a great stimulus for growth and expansion of
capacity late in a business cycle. Not all start-ups will produce a sustainable business
model, but there is no doubt investment-led capital markets are accelerating technical
innovation and the reconstruction of major industries. Interestingly, bank holding
companies have been some of biggest players in venture capital, recognizing a profit
stream when they see (need) one. While high technology may help influence job growth, free
flowing investment capital has shaped, promoted, and catalyzed high technology. The
"Silicon Parkway" in the State is no accident as Stamford has emerged as
Connecticut's "e-Center".
Real Estate
Real Estate employs about 12 percent of total employment in the FIRE division and
should extend job gains again this year as some "wealth effect" induced buying
and upgrading endures for now. However, housing inventories are tight in desirable areas
as speculative building has been held somewhat in check by increasing interest rates,
labor and material supply constraints, less extreme lending practices, and tougher zoning
mandates. The web, albeit, is keeping the real estate market more fluid. Commercial real
estate has been bolstered by real estate investment trusts (REIT's) looking for
office space bargains and is benefiting from the office space needs of startups.
Mighty Oak
Employment levels in the FIRE industry look sturdy for now as the sector has partially
redefined its industry structure in Connecticut. Today, there is less unhedged insurance
exposure and more efficient management of capital in all FIRE sectors. Truly, the FIRE
division in Connecticut is, in some ways in a very advantageous position. An economy that
inspires private-led investment will create new markets and industry synergies that can
redirect our State's prospects. The markets of just ten years ago had more government
swayed investment with the Cold War industrial policy mindset firmly intact.
Some believe, however, this expanded emphasis on investment-related employment growth
in FIRE industries actually makes the State more vulnerable to events like a stock market
decline. No one knows the stock market's direction in this current market of
extremes, but if positive productivity trends keep company earnings healthy, higher market
valuations can result from the already corrected levels. And could we be any more
vulnerable than during the early nineties when we were more reliant on multi-line
insurance companies that were over-exposed to natural disasters?
This investment-led advancement is coordinating productive approaches to growth while
fostering new industry direction and specialization. The FIRE industry will be impacted
over the longer term by demographic shifts, global markets, technological innovation, and
financial market volatility. In response, the "Mighty Oak" that is Connecticut
should never forget its roots, but encourage all industry to branch out and transition to
change or it will become seasoned firewood in this advancing investment-led global
economy.
Bradley International Airport is a critical asset for
the Hartford-Springfield area. Improving its competitive position and success may well be
the most significant factor in determining the region's economic future over the next
two decades. The industry cluster leadership recognized this fact. Consequently, the
Industry Cluster's Transportation Advisory Board was asked to review all
aspects of the Bradley operations, as well as public-private management options, to
determine what steps, if any, could be taken to improve Bradley's competitive
situation.
Progress to date has included a worldwide review of
airport management arrangements conducted by Frasca & Associates, a leading airport
transportation and financing consulting firm, and completed in November 1998. In early
1999, the Governor's Council, DOT, and DECD agreed upon interviews with eight of the
world's leading airport managers regarding Bradley's potential and challenges.
Based upon this, Schipol Project Consult was selected to conduct a four-month study
of Bradley's operations and to make recommendations to improve its performance.
Michael Gallis was also asked to prepare a special report on Bradley drawing upon his
larger study for the Connecticut Regional Institute for the 21 st Century. The Schipol
recommendations and the Gallis report were presented to the Governor's Council in
December 1999.
Commissioner James F.
Abromaitis of the Connecticut
Department of Economic and
Community Development announced
that Connecticut communities
authorized 771 new
housing units in April 2000, a
24.9 percent decrease compared
to April of 1999 when 1,026
units were authorized.
The Department further indicated
that the 771 units permitted
in April 2000 represent a
decrease of 10.2 percent from the
859 units permitted in March
2000. The year-to-date permits
are down 13.4 percent, from
3,398 through April 1999, to
2,941 through April 2000.
New Haven County documented
the largest number of new,
authorized units in April with
185. Hartford County followed
with 151 units and Fairfield
County had 131 units.
Southington led all Connecticut
communities with 30 units,
followed by North Haven with 22
and Hamden with 20.
The Connecticut coincident
employment index reached
its highest ever-recorded level with
the release of (preliminary) March
2000 data. Less dramatic news
saw the Connecticut leading
employment index in January and
March at its highest level since
mid-1998. Until further notice, the
Connecticut economy will continue
to enjoy a robust expansion.
The coincident index, a gauge of
current employment activity,
surpassed the February 1989
peak of the last expansion in both
January and March 2000. Nonfarm
jobs rose by 27,500 between
March 1999 and March 2000
while total employment increased
by over 34,000. Moreover, the
unemployment rate fell to 2.3
percent, one percent below its
level in March 1999 and just
above the 2.2 percent level
reached in January 2000.
The leading index, a barometer
of future employment activity,
continues to move around its level
established in late 1996, although
it now operates near the upper
range of this recent plateau. It still
is the case, however, that the
leading index has yet to show any
movement away from this plateau,
either up or down.
As this story is written, the
Federal Reserve just raised the
Federal Funds rate by 50 basis
points (0.5 percent). Fed watchers
fully anticipated this move, as the
Fed has become increasingly
concerned about impending
inflation. Recent increases in
prices and wages signal an
economy whose temperature is
rising. A more subtle measure of
an overheating economy is the
more frequent news reports, both
nationally and locally, of unions
striking, or threatening to strike.
That activity represents a clear
sign that wage and price pressures
are building. The Fed hopes that
higher interest rates will lower the
temperature of the economy
without giving the economy a
severe chill. Nonetheless, the Fed
left strong warnings that other rate
increases may occur in the coming
months. As we approach the heart
of the presidential campaign,
however, Fed actions seem less likely.
In summary, the coincident
employment index rose from 96.2
in March 1999 to 103.0 in March
2000. All four components of the
index point in a positive direction
on a year-over-year basis with
higher nonfarm employment,
higher total employment, a lower
total unemployment rate, and a
lower insured unemployment rate.
The leading employment index
rose from 89.6 in March 1999 to
90.9 in March 2000. Four index
components sent positive signals
on a year-over-year basis with a
lower short-duration (less than 15
weeks) unemployment rate, lower
initial claims for unemployment
insurance, a higher average
workweek for manufacturing
production workers, and higher
Hartford help wanted advertising.
One component sent a negative
signal on a year-over-year basis
with lower total housing permits.
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