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Connecticut Economic Digest: June 2005 issue

Connecticut Industry Employment Outlook to Fourth Quarter 2004
By Daniel W. Kennedy, Ph.D., Senior Economist, DOL

The current economic climate, to put it mildly, is uncertain. Many indicators have been signaling that a strong recovery has been proceeding apace; others caution maybe not. International risks loom especially large. What if, after June 30th, the Iraqi nation-state disintegrates? What about repercussions from prisoner abuses? Is Afghanistan de-stabilizing? Is the Israeli-Palestinian situation on a new and even more dangerous course? Is China's economy in a bubble that is about to burst? Is Japan's recovery real this time? North Korea is still a touch-and-go situation. Then, there are rising energy prices. Domestically, everyone asks: "Where are the jobs?" Though the U.S. showed a 337,000 job gain in March and 288,000 gain in April, is it sustainable? Further, Connecticut has not jumped on the jobs 'band wagon.' The Fed stood pat in April, but signaled that higher rates are on the way. If all this were not enough, 2004 is a presidential election year!

This is quite a backdrop for forecasting industry employment over the next two years. Nevertheless, undaunted, we forecast. To begin with, as of May 2004, the current downturn in employment for Connecticut, which began in July 2000, is now 46 months old, making it the longest (though not the steepest) on record. It surpassed the Great Recession (1989-1992), which lasted 42 months, in February. The question on everybody's mind is, of course: When does it end? Before addressing that question and what to expect over the next two years, a brief review of recent history will serve as a convenient jumping-off point for the 2005:Q4 industry employment forecast.

In line with the two-year forecast horizon, three historical two-year periods are analyzed. Note that the following discussion is based on the unadjusted employment series, as seasonally adjusted series are not available at the industry detail level used to forecast short-term employment. Employment levels for historical periods 1999:Q4, 2001:Q4, 2003:Q4, and the forecasted values for 2005:Q4, in addition to changes and percent changes, can be found in the table on page 3.

Recent trends in Connecticut employment

The different scales of employment make it difficult to compare the performance of the U.S. and Connecticut labor markets. A standardized measure, going beyond simple percent change, would allow Connecticut and the U.S. to be compared on a meaningful basis. One such comparison would be the number of jobs added, per 100 jobs lost. This measurement, reveals a dramatic difference in the number of jobs created, per 100 jobs lost in the U.S. economy, compared with the Connecticut economy over the 1997:Q4-1999:Q4 period. For every 100 jobs destroyed, the U.S. created 1,678 jobs, while Connecticut created 629. Of course, this was the period of the Boom-Bubble economy. The U.S. participated in the high tech-dot.com bubble more extensively than Connecticut (especially places like Greater Boston and the Bay Area-Silicon Valley). Similarly, it would be expected that, in the aftermath, the U.S. economy's ability to create jobs would have been weakened more than that for Connecticut. But that does not seem to be the case. Over the subsequent period (1999:Q4-2001:Q4), the period containing the 2001 March-November national recession, Connecticut created 103 jobs for every 100 destroyed, but the U.S. created 129. For the most recent historical period (2001:Q4-2003:Q4), Connecticut only replaced one-third of every 100 jobs lost, while the U.S. economy replaced two-thirds of every 100 jobs lost.

How broadly based was this growth? The breadth of an economy's employment growth base is an important consideration. To investigate this, a simple Diffusion Index (DI) of employment growth for the U.S. and Connecticut is constructed to gauge the breadth of job growth. The DI provides a measure of the percent of nonfarm sectors expanding. A broad-based expansion in the labor market would be characterized by a DI > 50.0.

Connecticut's employment growth over the 1997:Q4-1999:Q4 period appears to have been more broadly based than that of the U.S. Connecticut's DI value for this period was 89.5, compared to 78.9 for the U.S. However, the breadth of Connecticut's employment growth dropped below that of the U.S. over 1999:Q4-2001:Q4 (42.1 versus 68.4). Subsequently, it recovered, and was equal to that for the U.S. from 2001:Q4 to 2003:Q4 at 42.1.

2001:Q4-2003:Q4 in focus

Between 2001:Q4 and 2003:Q4, Connecticut created 18,000 jobs and destroyed 57,000 jobs, for a net loss of 39,000 jobs. Seven industry sectors accounted for all the jobs Connecticut created over this period. Three of those sectors: accommodation and food services, health care and social assistance, and government, accounted for 13,000, or 72%, of all the jobs created between 2001:Q4 and 2003:Q4. As expected, manufacturing accounted for the largest chunk of job losses, in both Connecticut and the U.S., over the 2001:Q4-2003:Q4 period. Manufacturing accounted for 45.3% (24,735 jobs) lost in Connecticut. The losses were even greater for the U.S. where manufacturing accounted for 56.8%, or 1.5 million, of the 2.6 million jobs lost in the U.S. economy between 2001:Q4 and 2003:Q4.

Outlook for Connecticut employment

If March and April's increases in U.S. employment (seasonally adjusted) are 'real,' then, so far, Connecticut is not participating in the national jobs recovery--losing 2,000 jobs since December 2003.

It is expected that job growth in Connecticut will be modest for the next eight quarters. The forecast for net job creation over the 2003-2005 forecast period (measured fourth quarter-to-fourth quarter) is approximately 11,000. As forecasted in the October outlook, it is expected that most of this net new job creation will occur in the second and third quarters of 2004, and into the first half of 2005, with job creation rapidly decelerating going into the second half of 2005. Approximately 7,000 net new jobs should be added in 2004, with 4,000-5,000 in 2005. The October forecast projected 4,000 new jobs for 2004. The current forecast, though slightly higher, is still modest. In fact the October and current forecast could be thought of as upper and lower bounds, with a mid-range forecast of 5.500 net new jobs, if one were to combine the two. The graph on the front page presents the net job growth for two historical periods, 2001-02 and 2002-03, and the two forecast periods: 2003-04 and 2004-05.

Sectoral contributions to the forecast

Eleven sectors are expected to create 24,900 jobs between 2003:Q4 and 2005:Q4. On the other hand, eight sectors are expected to eliminate 13,800 jobs, for a net increase of 11,100 jobs over the eight-quarter forecast horizon. Sixty-four percent of all new jobs created by the Connecticut economy over the next two years are expected to be in four sectors. Three of these sectors will contribute more than 5,000 new jobs to Connecticut's economy. Together, these three sectors will account for 15,900 new jobs. Educational services will account for 22.1%, or 5,500 new jobs; health care and social assistance will contribute 21.4%, or 5,300 new jobs; and accommodation and food services will account for 20.1%, or 5,000 new jobs.

Of the eight sectors with net job destruction over the forecast horizon, manufacturing will account for 74.0%, or 10,200 of the expected 13,800 lost jobs. The only other sector expected to lose more than 1,000 jobs is retail trade.

Sectoral growth rates over the forecast period

Educational services is expected to increase its pace from the previous period, growing ten percent over the forecast period. Accommodation and food services, and arts, entertainment, and recreation are both expected to grow more than 4%, but less than 5%. Finance and insurance is expected to grow by a little over one percent. Wholesale trade, construction, government, and professional, scientific and technical services are all expected to grow by less than 1%.

Utilities and manufacturing are each expected to decline by 5% or more between 2003:Q4 and 2005:Q4. Mining will lose 4.3% of its employment, and information and administration and support are each expected to decline by more than 1%. Finally, retail trade, real estate and rental and leasing, and management of companies and enterprises are projected to have employment declines of less than one percent.

Assumptions and risks to the forecast

It is assumed that modest job creation will continue in the U.S. economy through the third quarter of 2004, with a slower trend in job growth in 2005. Connecticut will lag the U.S. in jobs recovery. Expected job gains will come sometime in the second quarter and continue until the fourth. But these gains will be modest. Job growth should decelerate in 2005. Productivity growing faster than GDP and continued significant excess capacity will mute job growth on the one hand, but allow the Fed to proceed slowly on any course of interest rate increases, on the other. However, growing Federal deficits or sustained strong growth could accelerate the pace of rate increases. It is assumed that the State's fiscal situation will remain modestly improved throughout the forecast period. It is assumed that the effects of rising interest rates and house prices, in conjunction with high debt-levels, will eventually slow housing activity for the rest of 2004, and into 2005. Many are 'getting in under the wire' in the beginning of 2004, as long-term rates recently jumped. The effect of cumulative rate increases could be a reduction in discretionary income for a significant number of Connecticut's households.

There are substantial domestic risks that could threaten the forecast. If the economy is still relying on monetary and fiscal stimulation to grow, then the forecast, as conservative as it is, could be optimistic. However, if the economy accelerates to the point where even with strong productivity growth workers must be added, then the forecast will be pessimistic.

And last, but by no means least, there are the risks posed by the Federal deficit. In its April 2004 report, the International Monetary Fund not only warned that the deficit was a threat to the U.S. recovery and its long-term economic viability, but, in fact, a threat to the world's economy.

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Housing Update
Year-to-date permits up 26 percent

Commissioner James F. Abromaitis of the Connecticut Department of Economic and Community Development (DECD) announced that Connecticut communities authorized 1,022 new housing units in April 2004, a 19.4 percent increase compared to April of 2003 when 856 units were authorized.

The Department further indicated that the 1,022 units permitted in April 2004 represent a 10.0 percent increase from the 929 units permitted in March 2004. The year-to-date permits are up 26.0 percent, from 2,539 through April 2003, to 3,198 through April 2004.

The New London Labor Market Area showed the largest number and percentage gains (89 units, 92.7 percent) compared to a year ago. Groton led all municipalities with 92 units, followed by East Hampton with 29 and Danbury with 28. From a county perspective, New London and Fairfield Counties showed largest gains of 86 and 52 units respectively.

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Last Updated: June 3, 2004