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Connecticut Economic Digest: April 2003 issue
Connecticut Industry Employment Outlook to Second Quarter 2004 | Industry Clusters | Housing Update

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

Introduction

This outlook for Connecticut industry employment covers a two-year forecast horizon to the second calendar year quarter of 2004. This forecast was done using the Standard Industrial Classification (SIC) system. With the conversion to the North American Industry Classification System (NAICS) future forecasts will use the NAICS. Finally, 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 that is used to construct the forecast.

Connecticut Employment: Recent History

This analysis is divided into three time periods: two, two-year historical periods and the two-year forecast period. The first historical period, 1998:Q2 to 2000:Q2, covers the late nineties boom. The second historical period, 2000:Q2 to 2002:Q2, includes the "bust," and the September 11th terrorist attacks. The end point serves as the base quarter for the two-year forecast period, 2002:Q2 to 2004:Q2. The table on page 3 presents employment levels, changes, and percent changes for State total nonfarm employment and the major SIC divisions for these three reference periods, and is the principal reference for much of what follows. The next section briefly sketches the two historical periods of analysis, which span the boom and the bust years.

The Boom and the Bust

The Connecticut economy went along for the ride as it benefited from the rapid growth and declining unemployment produced by the U.S. economy. The American economic machine turned in a performance that had not been seen since the 1960's. Productivity increased, inflation declined, the stock market climbed, dot.coms popped up faster than mushrooms, and Federal budget deficits turned into surpluses. The stock market had not experienced a run-up like that of 1999-2000 since, well, 1929. And, by March 2000, the boom abruptly went bust. The NASDAQ fell to earth, and the Dow and S&P 500 soon followed. In the summer of 2000, business investment spending collapsed. By March 2001, according to the National Bureau of Economic Research (NBER), the U.S. economy had entered a recession ending the longest expansion in U.S. history. Since then, further damage has been inflicted on the economy by the September 11th attacks, the impending war with Iraq, tensions with North Korea, the Venezuelan oil worker strike, and the corporate accounting and fraud scandals, which contributed to the second wave of wealth destruction in the stock market in two years.

Throughout this whole period Connecticut's economic fortunes were closely tied to those of the U.S. economy. Thus, while it was along for the ride during the boom, it has also been along for the ride during the bust.

Connecticut Employment in the Boom Years

Connecticut's economy created 71,000 jobs over the boom, and destroyed just under 15,000 jobs, for a net gain of 56,000 jobs. That represents a 3.4 percent net growth in Connecticut nonfarm employment over the 1998:Q2-2000:Q2 period. Connecticut's sources of growth were similar to those that generated job growth in the U.S. economy. Construction was the fastest growing division in the State and the nation, growing over 11 percent for both Connecticut and the U.S. Though services and government were among the fastest growing divisions in both the Connecticut and U.S. economies, the growth rankings in these two divisions were reversed for Connecticut, reflecting the expansions of the Indian casinos. Also, reflecting rapid growth, especially in Stamford and Fairfield County, finance, insurance, and real estate (FIRE) employment grew faster in Connecticut than it did nationally over the boom period.

Services accounted for the largest number of new jobs created in both the Connecticut and U.S. economies. Over the boom period, Connecticut's services division added 25,000 new jobs, representing 35 percent of all job growth. Services' contribution was even larger in the national economy, accounting for 44 percent of all new jobs. Government also accounted for a larger share of job growth in the U.S. than in Connecticut. Nevertheless, Connecticut's government division, driven by the expansion of the New London County casinos, contributed the second largest number of new jobs (more than 16,000), and accounted for 23 percent of boom period growth in employment.

Even as the economy booms, jobs are still being destroyed, but at a lower rate. Manufacturing accounted for all of the nearly 15,000 jobs that Connecticut lost between 1998:Q2 and 2000:Q2, with durable goods accounting for over 12,000 of those lost jobs. The U.S. too, suffered significant erosion in manufacturing jobs, as employment declined by nearly 2 percent over the late-nineties boom, which represented 87 percent of job losses. The U.S. mining sector suffered the steepest decline; its employment contracted by nearly 9 percent, accounting for almost 13 percent of job losses.

Connecticut Employment after the Bust

The beginning point for the bust period, 2000:Q2, is just one period before the peak in Connecticut's nonfarm employment, which was in July 2000, eight months before the peak in U.S. employment. From 2000:Q2 to 2002:Q2, Connecticut's economy created 10,000 jobs, but it also destroyed over 30,000 jobs, for a net loss of 20,132 jobs. Connecticut's employment base contracted by 1.2 percent over that 24-month period.

After the bust, Connecticut's steepest declines in employment are found in the same industries as those that suffered the biggest hits nationally. Both the Connecticut and U.S. manufacturing divisions had the largest percent loss in employment after 2002:Q2. However, with a much higher concentration of semiconductor manufacturing and other hard hit IT-related sectors, U.S. manufacturing employment suffered a steeper 9.4 percent decline between 2000:Q2 and 2002:Q2, than Connecticut manufacturing, which declined 7.9 percent. Manufacturing accounted for three-quarters of all jobs lost in the U.S. economy after the bust, compared to two-thirds of Connecticut's job losses.

Connecticut manufacturing shed over 20,000 jobs between 2000:Q2 and 2002:Q2. Though durable goods eliminated close to the same number of jobs during the bust (-13,600) as it did over the boom (-12,500), it was non-durable goods that took a big hit after 2000:Q2. During the boom years, non-durable goods shed a little over 2,000 jobs. During the bust years, Connecticut's non-durable goods sector lost three times as many jobs as it did over the previous period. Between 2000:Q2 and 2002:Q2, over 7,000 jobs were destroyed.

Wholesale trade eliminated over 5,000 jobs accounting for just under 18 percent of Connecticut's job losses over the 2000:Q2-2002:Q2 period. Transportation, communications, and public utilities (TCPU) lost almost 2,500 jobs, accounting for nearly 8 percent of the decline in nonfarm employment. The bust's impact on construction and retail trade were quite different for Connecticut compared to the U.S. Due to casino expansion, construction accounted for only 1 percent of Connecticut's job losses, compared to accounting for 3 percent of losses nationally. Nationally, retail trade accounted for 2 percent of all jobs created, but it accounted for 5 percent of all jobs lost in Connecticut.

As jobs were still being destroyed over the boom, so too, jobs were still being created during the bust. Research indicates that the collapse in the job creation rate plays a larger role in rising unemployment during a recession, than does the rise in the job destruction rate. The behavior of job creation and destruction in the Connecticut economy, over the boom and bust periods, seemed to conform to those findings. Though the number of jobs destroyed doubled from the boom to the bust period, the Connecticut economy created seven times as many jobs during the boom as it did during the bust years (i.e., job-creation fell to 1/7th its boom period rate).

The fastest growing U.S. industry divisions between 2000:Q2 and 2002:Q2 are ranked differently than those for Connecticut. Discounting mining, the fastest growing division for the U.S. was services, followed by government, which reverses the Connecticut rankings of these two divisions. The most pronounced differences in growth were in the FIRE division. Fueled by the low interest rate environment, the housing market boom ignited an explosion in employment growth in the mortgage banking and other related sectors. Consequently, employment the FIRE division, nationally, grew by 2.4 percent. However, employment in Connecticut's FIRE division grew an anemic 0.4 percent.

Again, in what seems to re-affirm the importance of the collapse in job creation as a critical factor in a downturn, the services division failed to be the engine of growth that it had been in the previous period. The services job machine cranked out over 25,000 jobs during the boom, but shut down during the bust and only produced just under 5,900 jobs. That is, for every 4.2 jobs the services division created over the 1998:Q2-2000:Q2 period, it only created one job in the 2000:Q2-2002:Q2, bust period. Nevertheless, the services division's meager performance still accounted for nearly 59 percent of the total number of jobs created. The next most important engine of job growth over the boom period, the government division (which includes the Tribal Nations), also sputtered. While creating over 16,000 jobs between 1998:Q2 and 2000:Q2, it only created just over 3,700 jobs between 2000:Q2 and 2002:Q2. That is, for every 4.3 jobs created by the government division over the boom, it only created one job during the bust years. However, government still accounted for over 37 percent of the all jobs created over this period.

The relative collapse of job creation was probably the most dramatic in the FIRE division. While creating 7,000 jobs over the 1998:Q2-2000:Q2 period, the FIRE division added less than 600 jobs from 2000:Q2 to 2002:Q2. For every job the FIRE division created during the bust period, it had created 11.7 jobs in the previous boom period. FIRE accounted for just under 6 percent of the jobs created from 2000:Q2-2002:Q2.

Outlook for Connecticut Employment: 2002:Q2-2004:Q2

The rate of job loss is expected to re-intensify over the first half of 2003, and then abate in the last half of the year. Modest growth should return in the first half of 2004, the end-point of the forecast period. This will still leave a net decline of approximately 2,100 jobs over the two-year forecast period.

It is expected that some 18,000 jobs will be created while another 20,000 will be lost, producing the net result of -2,100. That represents a net decline of 0.13 percent in the nonfarm employment base over the eight quarters of the forecast period. The only major division that is expected to generate any job growth at all is the services division. It is forecasted to grow by 3.3 percent between 2002:Q2 and 2004:Q2. It will account for nearly 17,900, or 98 percent, of the slightly more than 18,000 jobs added to the Connecticut economy over the forecast period.

The State's concentration of "day-trip" destinations, especially in New London County, is expected to make travel, tourism, and leisure the fastest growing industries in the services division, which is forecasted to grow by 7.4 percent. The next fastest growth is expected to be in other services (+4.8 percent). Driving the creation of jobs in this category are membership organizations and services provided by those working on their own, such as actuaries, artists, writers, geologists, etc.

Health Services is expected to grow by 3.5 percent, and business services, engineering and management, and social services are all expected to grow between 1 percent to 3 percent during the 2002:Q2-2004:Q2 forecast period. Just over 10,000, or 57 percent, of new services jobs will be in health services and other services. Growth in health care employment reflects the rising elderly population and other demographic and public health trends and pressures. In fact, were it not for the Federal caps on Medicaid and Medicare and the nursing shortage, employment growth in health services would be even stronger.

Two other industry sectors expected to have increases, TCPU and FIRE, will each grow by less than 1 percent. Construction and mining are expected to contribute few new jobs through early 2004.

Reflecting the current recession, and the continuation of the long-run trend, manufacturing will decline by another 6.3 percent between 2002:Q2 and 2004:Q2. It will account for more than 15,000, or three-quarters, of the 20,000 jobs the Connecticut economy is expected to shed over the forecast period. Over 13,000 of the 15,000 jobs lost in manufacturing are expected to be in durable goods, with the furniture and fixtures industry taking the biggest hit. Employment is expected to fall by 20 percent over the forecast period. Primary metals and lumber and wood products are expected to decline by 16 percent and 14 percent. Fabricated metals, industrial machinery and equipment, and miscellaneous manufacturing are expected to lose between 9 percent and 12 percent of their employment base.

Non-durable goods employment is expected to account for more than 2,000 of the manufacturing jobs lost between 2002:Q2 and 2004:Q2. The two steepest declining industries, textile mill products and apparel and textile products, are each forecasted to lose over 22 percent of their jobs over the forecast period. The next biggest declines will be in leather and leather products (-17 percent), and petroleum and coal products (-14 percent).

Six of manufacturing's 20 industries are expected to lose 1,000 or more jobs over the forecast period. They will account for over 12,500, or 94 percent, of the 13,000 lost manufacturing jobs. All but one of those industries is in durable goods. The five durable goods industries are fabricated metal products (-3,380), electronic and other electrical equipment (-2,851), industrial machinery and equipment (-2,648), primary metals (-1,289), and instruments and related products (-1,101). The only non-durable goods industry forecasted to lose more than 1,000 jobs over the forecast period is printing and publishing (-1,252).

Most of the remaining job losses will be in the government division. Based on current and projected reductions in government employment at the State and local levels, almost 5,000, or 23 percent, of the employment losses are expected to come from the government division. Since gambling usually holds up pretty well during economic downturns, employment should remain stable at the casinos. Retail and wholesale trade are expected to have small declines in employment (fewer than 200 each).

Forecast Assumptions and Risks

Three State-specific events will affect the forecast outcome. First, the forecast is based on the assumption that the budget deficit for the fiscal year beginning July 1st 2003 will not exceed, or significantly fall below, current projections. Second, it is assumed that the effects of deteriorating labor markets, in conjunction with rising house prices, will bring about a decline in housing activity in 2003. Third, a short bump-up in electricity rates, followed by a temporary rough spot, following the end of the Standard Offer on December 31st is assumed.

It is assumed that U.S. GDP will have annual growth of between 1.0 percent and 2.0 percent in 2003, and between 2.0 percent and 3.0 percent in 2004. Another critical assumption is that the Federal Reserve will cut the Federal funds rate 25 basis points at least once, maybe twice in 2003, and remain neutral in the first half 2004. Finally, the U.S. labor market will further deteriorate in 2003, and U.S. housing will cool, especially in the Northeast and Midwest.

The principal non-economic geopolitical cloud hanging over everything is, of course, the impending war with Iraq, which may be underway as this goes to press. The risks to the forecast are quite high. If war with Iraq, its aftermath, and U.S. occupation do not go well, the forecasts would be very optimistic, especially if it destabilizes the Middle-East or inspires new terrorist attacks against U.S. domestic targets, or both. Further, damage to Iraqi and possibly Kuwaiti oil fields could spike oil to $50-$100 per barrel. If the war were short and decisive, with no complications, then the forecast would be too pessimistic. Other geopolitical negative risks include the escalation of the North Korean standoff, and potential crises that could develop in Pakistan.

For the complete paper with forecast methodology contact Daniel Kennedy at 860-263-6268, or email daniel.kennedy@po.state.ct.us.

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Industry Clusters
The British are Coming! The British are Coming!

More than 200 years after the colonists named their cities "new" versions of the British municipalities they left behind, representatives looking to revitalize three English cities and four boroughs of London came to Connecticut February 25 to see how the State is doing just that through Governor Rowland's Inner City Business Strategy.

The British group - called City Growth Strategies (CGS) - visited Bridgeport in the morning, where they heard from City Champion Mickey Hebert, President and CEO of the Bridgeport Bluefish; Kevin Nunn, President of the Bridgeport Economic Resource Center; and George Dunbar, President of U.S. Baird Corporation and Chairman of the METAL (Metal Manufacturing Education and Training Alliance) cluster.

In the afternoon, a trip to Hartford introduced the group to City Champion Robert Patricelli of Women's Health USA; Oz Griebel of the MetroHartford Regional Alliance; Harry Freeman of the Hartford Economic Development Commission; and Eddie Lacy and Joseph Barber of the Hartford 2000 Community Economic Development Committee.

During their one-day visit, CGS gained valuable insights into Connecticut's Inner City Business Strategy and the different approaches being used in Bridgeport and Hartford to promote inner-city revitalization through market-driven business and human resource development.

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Housing Update
Permits Down in February

Commissioner James F. Abromaitis of the Connecticut Department of Economic and Community Development announced that Connecticut communities authorized 454 new housing units in February 2003, a 28.3 percent decrease compared to February of 2002 when 633 units were authorized.

The Department further indicated that the 454 units permitted in February 2003 represent a 27.8 percent decrease from the 629 units permitted in January 2003. The year-to-date permits are down 12.2 percent, from 1,234 through February 2002, to 1,083 through February 2003.

Only the Stamford Labor Market Area (LMA) showed an increase of housing units (20) compared to a year ago. The remaining nine LMAs experienced losses. Westport led all Connecticut communities with 31 units, followed by North Haven with 20 and Southington with 13 units. From a county perspective, only Tolland County had a gain of units (9) compared to a year ago.

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Published by the Connecticut Department of Labor, Office of Research
Last Updated: April 17, 2003