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Connecticut Economic Digest: November 2003 issue
Connecticut industry employment outlook to fourth quarter 2004 | Housing Update

Connecticut industry employment outlook to fourth quarter 2004
By Daniel W. Kennedy, Ph.D., Senior Economist, DOL

This is the first outlook for Connecticut industry employment using the North American Industry Classification System (NAICS). It covers a two-year forecast from 2002, quarter four (2002:Q4), to 2004:Q4. The NAICS-based forecast is broken into 19 industry sectors (the 20 NAICS industry sectors minus agriculture), and selected sub-sectors. It is important to keep in mind that the following discussion is based on the unadjusted employment series. Seasonally adjusted series are not available at the industry-detail level used in this forecast. What follows is a brief summary of the outlook to 2004:Q4.

Recent trends in Connecticut employment

When attempting to identify trends and cycles in the economy, it is important to consider seasonal influences on the activity being observed. Recent trends in Connecticut employment, therefore, are best revealed by the seasonally adjusted data series which show that Connecticut nonfarm employment peaked in July 2000. Thus, as of July 2003 Connecticut's employment has been down for three years. At 36 months, this puts the current downturn second to the Great Recession of 1989-92, which was 42 months in duration.

To provide a reference, based on the forecast horizon, three two-year (eight-quarter) historical periods are presented in the table on page 3. The first period (1996:Q4-1998:Q4) marks the approximate beginning of the U.S. economy's return to rapid productivity growth; but, it was also the period that includes the Asian crisis, the bailout of the Long Term Capital Management hedge fund, and the Russian default. The second period, (1998:Q4-2000:Q4); includes the run-up and bursting of the dot.com and stock-market bubbles, the collapse of investment spending, and the beginning of the job purge in manufacturing. The last period (2000:Q4-2002:Q4) covers the March-November 2001 recession, the September 11th terrorist attacks, the corporate governance crisis, the states' fiscal crises, the aborted 2002 expansion, and the lead-up to the invasion of Iraq. The endpoint of this last historical period serves as the base period for the forecast. Therefore, the following discussion focuses on the last historical period.

Over the 2000:Q4-2002:Q4 period, Connecticut's economy created some 30,000 jobs contributed by six NAICS sectors, all in the service providing segment of nonfarm employment. Connecticut's economy also eliminated more than 66,000 jobs over this period, for a net loss of nearly 35,000 jobs between 2000:Q4 and 2002:Q4. That represents a 2.0 percent decline in Connecticut nonfarm employment, compared to a 1.5 percent decline in U.S. nonfarm employment. Over this period, both the goods producing (-31,484) and service providing (-4,439) segments had net employment losses in Connecticut. The U.S. had a 9.1 percent decline in goods producing jobs, compared to 10.4 percent for Connecticut, and the U.S. added service providing jobs, albeit, at a 0.22 percent growth rate, an anemic performance, but growth nonetheless. Connecticut's service providing jobs declined by 0.32 percent.

Of particular interest are the large net gains in employment by two service providing sectors over the 2000:Q4-2002:Q4 period of turbulence and uncertainty. Health care and social assistance, driven by demographics, added 10,576 jobs over this period, and government, which includes the tribal nations, added 10,318 jobs. Four other sectors also had some impressive gains over this period.

Forty-two percent, or 27,790 of the 66,167 jobs lost over the 2000:Q4-2002:Q4 period, were in manufacturing. The relative decline in manufacturing was 11.8 percent. The loss of manufacturing jobs in the U.S. economy was even worse. U.S. manufacturing employment declined by 12.3 percent, or 2.1 million jobs. However, manufacturing is a much larger share of Connecticut's goods producing segment. For both the U.S. and Connecticut, every sector in the goods producing segment had a net loss of jobs. The relative declines for durable goods and nondurable goods employment for Connecticut were similar, -12.2 percent for durable goods, and -10.4 percent for nondurable goods. This compares to the U.S., which saw durable goods jobs decline by 13.9 percent, while U.S. employment in nondurable goods declined by 10.9 percent. By far, for Connecticut, nondurable goods had the largest acceleration in job losses over the 2000:Q4-2002:Q4 (the "bust" period), when compared to the previous two years, 1998:Q4-2000:Q4 (the "boom" period). Durable goods lost 21,397 jobs during the bust, compared to 9,935 jobs over the boom period, but while nondurable goods employment fell by 226 during the boom, job losses ballooned to 6,327 during the bust period, some 28 times the losses of the previous period.

Outlook for Connecticut employment

The continued job losses, especially in manufacturing, over the first half of 2003, and the probable weakness in the labor market going into the last half of the year, resulted in a slightly lower outlook for this forecast. Some job growth should return in the second and third quarters of 2004. It is expected that Connecticut will lose another 10,000 jobs in 2003 (not seasonally adjusted), and add 4,000 new jobs in 2004. The net result over the two-year forecast period is a decline off approximately 6,000 jobs.

The service providing segment of Connecticut's economy is expected to add 8,303 jobs between 2002:Q4 and 2004:Q4, however, the goods producing segment is expected to shed another 14,542 jobs, mostly in manufacturing. The net result will be a loss of 6,239 jobs, representing a 0.37 percent decline in total nonfarm employment. It is expected that nearly 10,000 jobs will be lost between 2002:Q4 and 2003:Q4, with an increase of a little more than 4,000 jobs between 2003:Q4 and 2004:Q4. Most of the gain is expected to come in the second and third quarters of 2004.

The manufacturing sector virtually accounts for all the losses in the goods producing segment of Connecticut's economy. Though the rate of job decline will ease from the 2000:Q4-2002:Q4 period, it is expected that 14,583 more jobs will be eliminated over the 2002:Q4-2004:Q4 period. Durable goods firms are expected to shed another 11,738 jobs, and nondurable goods another nearly 3,000 jobs. There is more than the business cycle at work here. As firms slide down the learning curve on their high-tech equipment, and as this learning-by-doing diffuses throughout the economy, they reduce the labor-input per unit of output. Hence, a significant number of workers in the manufacturing sector become redundant-and that process continues to produce rounds of labor reductions.

Other structural changes include the breaking down of jobs into other simpler component tasks, and then outsourcing them, many overseas. Competitive pressures from China and U.S. mega-box retailers, who use their buying power to pressure suppliers to aggressively exploit efficiencies, continue putting downward pressure on prices in the goods markets. These factors, coupled with remaining excess capacity and rising interest rates and consumer debt constraining demand will continue to constrain job growth in manufacturing.

After losing jobs over the 2000:Q4-2002:Q4 period, the service providing segment is expected to add 8,303 jobs over the eight-quarter period following 2002:Q4. Government will make the largest contribution, creating 8,086 jobs between 2002:Q4 and 2004:Q4. Local government, which includes the tribal nations, will account for 88 percent of those new public sector jobs (+7,116). It is expected that another nearly 1,800 jobs will be refilled by the State over this period. Driven by demographics, health care and social assistance is expected to be the second largest job creator by adding 3,611 net new jobs over the forecast period. Reflecting our aging population, 4,245 of those jobs will be in the health care services and facilities sector, which includes the ambulatory health care services, and nursing and residential care facilities industries. Educational services is expected to create 2,151 new jobs over the 2002:Q4-2004:Q4 forecast period, and administrative support and management is expected to add another 1,733 jobs by 2004:Q4.

Nevertheless, there are service providing sectors that are expected to have significant job-losses over the forecast period. The retail trade sector will shed 4,822 jobs. This is partly due to the anticipated slowing of consumer spending as interest rates, rising in response to the Federal government's deficit-financing needs, begin choking the boom in refinancing. This was the source of a significant portion of the consumer spending that has propped up the economy over the last three years. Another part is structural. The big, big-box retailers, or mega-boxes, especially Wal-Mart and Target, will continue to expand their presence. Due to economies of scale and by using their buying power to put pressure on suppliers to exploit efficiencies, growth in retail employment is constrained as competitors fold and big-box stores employ fewer workers-per-square-foot.

Professional, technical, and scientific services is expected to lose another 3,760 jobs over the next eight quarters. The information sector is expected to lose another 2,365 jobs over the forecast period. Management of companies and enterprises is expected to lose 1,734 jobs over the forecast period. Finally, wholesale trade is expected to shed 1,605 jobs.

Forecast assumptions

It is assumed that modest job creation will return to the U.S. economy in 2004. And, it is likely that Connecticut will follow the U.S. in a job recovery. It is also assumed that the State's fiscal situation will remain stable throughout the forecast period. It is assumed that the effects of rising interest rates and house prices, in conjunction with high-debt levels will bring about a decline in housing activity for the rest of 2003 and into 2004.

Finally, electric power adds uncertainty to Connecticut's outlook in 2004. Between congestion costs for Fairfield County, a possible 11.1 percent rate increase in January 2004, and though there is a 10 percent cap, the Standard Offer expires on December 31st. The effect of these potential cumulative rate increases could represent a reduction in discretionary income for a significant number of Connecticut's households.

For the complete paper with forecast methodology contact Daniel Kennedy, by phone, at (860) 263-6268, or, by e-mail, at daniel.kennedy@po.state.ct.us.

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Housing Update
Permit activity strong in September

Commissioner James F. Abromaitis of the Connecticut Department of Economic and Community Development (DECD) announced that Connecticut communities authorized 893 new housing units in September 2003, a 15.5 percent increase compared to September of 2002 when 773 units were authorized.

The Department further indicated that the 893 units permitted in September 2003 represent a 5.1 percent increase from the 850 units permitted in August 2003. The yearto-date permits are down 0.5 percent, from 7,307 through September 2002, to 7,269 through September 2003.

Seven of the ten Labor Market Areas showed increases in the number of permits issued when compared to a year ago. South Windsor led all municipalities with 116 new units, followed by Southbury with 27 and New Haven with 21. From a county perspective, only Hartford and New London counties had year-to-date gains of 17.7 percent and 7.3 percent respectively.

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Last Updated: November 1, 2003