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Connecticut Economic Digest: January 2000 issue
Positive Signs for State Economy in 2000 | Industry Clusters | Housing Update | Leading Index Rebounds, But Future Still Uncertain

Positive Signs for State Economy in 2000
By Mark Prisloe, Associate Economist

Most indicators of Connecticut's economy look strong going into the year 2000. Employment, income, output, housing permits, retail sales, tax collections, business starts, and business confidence all ended the year on a strong note. Although consumers' future expectations showed only a slight dip at year's end, hints of uncertainty and the unusually long duration of the current expansion make any predictions of the economy's transition to the new millennium more fragile than in most years. Yet, except for the tight labor market, there are no major signs of any real trouble in the year ahead and no recession is foreseen. Barring any major Y2K disruptions, the State's economy is likely to see continued, if slower growth.

Sustainable Growth

As with last year's forecast, the trend is for slower, but sustainable expansion. Employment may increase by only 12,000 in 2000, below the 26,100 jobs gained in Connecticut through the twelve months from November last year. The labor market must grow to support further expansion. Connecticut will need to attract as well as retain that segment of the labor force and population that comes from the younger, college-educated workforce. Hence there is urgency to the State's campaign "You Belong in Connecticut."

One rather stunning development in 1999 was the story of the unemployment rate. It reached an unprecedented and statewide low of 2.1 percent last August, and while the rate has crept back up to 2.9 percent in November, it has remained the lowest in over a decade and well below the November national rate of 4.1 percent. Through the third quarter, the rate declined in all ten of the State's labor market areas.

Strong Consensus

The basis for a positive scenario in 2000 is a strong consensus that Connecticut's economy will continue to expand. One such outlook is the proprietary New England Economic Project (NEEP) forecast for Connecticut, for example, prepared semi-annually for the six-state consortium of business, academic, and government subscribers. Presenting the NEEP Connecticut forecast, Fairfield University Economics Professor, Dr. Edward J. Deak anticipates higher growth constrained only by the available labor supply and movements by the Federal Reserve Bank or on Wall Street.

The Connecticut Economic Conference Board (CECB) in a November annual meeting, heard from State Street Bank Corporation Chief Economist Fred Breimyer who also foresees continued economic momentum. The CECB report is due in early February.

The Hartford Area Business Economists (HABE) 2000 annual survey due to be released this month is likely to be another positive assessment given the state and national indicators examined. HABE members annually rate current conditions and predict State employment, income, housing permits, retail sales, and related national variables.

The University of Connecticut's Center for Economic Analysis (CCEA), in its quarterly review The Connecticut Economy, publishes a coincident and a leading index. Through the third quarter, the coincident index reached yet another high in 1999. A reading above the moving average indicated continued expansion. Moreover, a gain in the leading index also suggested the future economy regaining momentum. The Digest's monthly coincident index, produced by the CCEA, dropped from its August peak, but remained above its year-ago level, while the leading index rebounded.

Tracking Success

Key economic variables exhibited the following trends. Employment, as noted already, rose again last year to 1,678,600 as of November, up 26,100 from one year ago. The November unemployment rate of 2.9 percent was three-tenths of a percentage point below that of a year ago, and a full 1.2 percent below the national rate of 4.1 percent. Housing permits, even when they dipped slightly in October, were still at their second highest level for the year-to-date in the entire decade. Construction contracts were up in September more than 31.2 percent from a year ago. Similarly, retail sales were up 5.9 percent through September.

Conclusion

In conclusion, the Connecticut economy in 2000 looks strong. Yet, there are always downside risks that might temper even the most optimistic of forecasts. The strong 5.5 percent increase in the third quarter Gross Domestic Product (GDP), the total dollar value of all final goods and services produced in the U.S., might, along with robust stock market conditions, push the Fed to raise interest rates again in the early spring. This would be the fourth interest rate hike since the monetary authorities started applying the brakes to keep the national economy within its preferred three percent growth rate that is believed to be sustainable without inflation. Only time will tell. In the meantime, the Nutmeg State, "the land of steady habits," can expect more economic expansion.


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NAICS - A New Look at Connecticut Industry
By Doreen LeBel, Research Analyst

The first two phases of the North American Industry Classification System (NAICS)

implementation are complete, providing a preview of Connecticut's economic structure under the new industry classification system. (For more background on NAICS, see the November 1996 issue of the Digest on line at www.ctdol.state.ct.us/lmi.) The implementation began in August 1998 with the identification of NAICS classifications for worksites in Standard Industrial Classification (SIC) industries with one-to-one relationships with NAICS industries. From October 1998 to August 1999, all firms with employment greater than fifty, as well as one half of the "splits" (worksites in SIC industries that have been divided into more than one NAICS industry) were surveyed and assigned a NAICS code. With these two phases complete, 74 percent of all units representing 86 percent of Connecticut employment have been assigned NAICS codes.

The Connecticut Department of Labor's Office of Research assigns industry classifications to companies in order to produce economic statistics by industry for the State. Using first quarter 1999 data, the charts on the next page illustrate Connecticut's industry structure under the two classification systems. By classifying the State's employment into twenty NAICS sectors compared to ten SIC divisions, one gets a somewhat different view of business activity in Connecticut. This effect is most clearly illustrated in those activities associated with Service industries under the SIC system. The dominance of the Service industries can be seen as 40 percent of all employment is classified in this SIC division. Recognizing this and the need to refine the classification of Service activities, NAICS distinguishes eight "service" sectors. The largest of these are the Healthcare and Social Assistance sector (14% of total employment) and the Educational Services sector (10%).

While manufacturing employment has been declining in numbers, NAICS will not significantly alter the proportion of the State's employment classified in Manufacturing activities (17% under SIC vs. 16% under NAICS). Also relatively unchanged proportionately under NAICS are Wholesale Trade, Construction, Mining, and Public Administration.

Retail Trade continues to be the third largest grouping under NAICS, although the move of Food Service to the NAICS sector Accommodations and Food Service results in a decline to 12 percent of total employment. Under SIC, the Finance, Insurance and Real Estate (FIRE) division accounts for eight percent of total employment. The removal of Real Estate to the NAICS sector Real Estate, Rental and Leasing has little impact, with Finance and Insurance still accounting for seven percent of total employment under NAICS.

Transportation was the largest component of the SIC division Transportation, Communication and Public Utilities (TCPU). Under NAICS, the Transportation and Warehousing sector is three percent of total employment, while Utilities is only one percent. Communications, along with publishing from the Manufacturing division and computer applications and data processing and libraries, make up the important new NAICS sector, Information, with three percent of total employment.

Although it is only a small part of Connecticut's employment, the Agricultural group suffers the largest declines under NAICS. This is due to the reconceptualization of veterinary and pet care and landscaping activities as "services", rather than agricultural-related activities. Only 36 percent of the employment categorized as agricultural under SIC continues to be so under NAICS.

The NAICS sector Management of Companies and Enterprises currently comprises less than one percent of total employment. This sector will undergo the most change during the next phase of NAICS implementation, which began in October. In addition to surveying and assigning NAICS codes to the remaining one quarter of the State's worksites, a supplemental survey form will be sent to all worksites currently designated as auxiliary units under SIC. (An auxiliary unit is one that performs support activities such as corporate or warehousing functions for an enterprise.) Under SIC, these worksites were classified according to the main activity of the enterprise. Under NAICS, these worksites will be classified according to the business activity of the unit. Those worksites that are corporate headquarters will be classified under the NAICS sector Management of Companies and Enterprises.

By September 2000, all worksites in Connecticut will be assigned a NAICS code. During the following year, the Retail Trade and Construction sectors will be revised to further refine the industries within these groups. Due to these revisions, publication of employment by NAICS sector will be delayed until 2002, when 2001 data will be released.

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Industry Clusters
Aerospace Core Created

A core group of Aerospace Components Manufacturers (ACM) has initiated a program to strengthen Connecticut's aerospace cluster. Through DECD support, a new non-profit 501 C (3) organization has been formed to manage the group's programs under the direction of a six-member board of directors, all of whom are company presidents. A two-year plan aimed at achieving worldwide recognition as a premier source of aerospace components is being financed by a DECD investment leveraged with over $500,000 in industry support.

ACM's program has four main elements. Each is planned and managed by teams of representatives from member companies. Highlights of the Cluster's goals and action steps are:

  1. progressive manufacturing practices
  2. workforce development
  3. business practices for competitive enterprises, and
  4. special programs.

ACM has already conducted Lean Manufacturing seminars in collaboration with CONN/STEP, engaged over 70 member employees in jointly-designed manufacturing skills courses with the Department of Labor, and signed a purchasing agreement on behalf of its member companies for volume-based discounts on machining inserts. ACM has retained an association-management firm to manage administrative, financial, and communication functions with a full-time executive director. A Special Projects Team has been created to conduct focused promotion projects.

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HOUSING UPDATE
November Permits Up 25.2 Percent

Commissioner James F. Abromaitis of the Connecticut Department of Economic and Community Development announced that Connecticut communities authorized 1,023 new housing units in November 1999, a 25.2 percent increase compared to November of 1998 when 817 units were authorized.

The Department further indicated that the 1,023 units permitted in November 1999 represent an increase of 36.9 percent from the 747 units permitted in October 1999. The year-to-date permits are down 2.6 percent, from 10,412 through November 1998, to 10,146 through November 1999.

Reports from municipal officials throughout the state indicate that Fairfield County with 111.3 percent showed the greatest percentage increase in November compared to the same month a year ago. New Haven County followed with a 61.1 percent increase.

Fairfield County documented the largest number of new, authorized units in November with 336. New Haven County followed with 211 units and Hartford County had 178 units. Stamford led all Connecticut communities with 163 units, followed by Hamden with 49 and Danbury with 48.

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Leading Index Rebounds, But Future Still Uncertain

The Connecticut coincident employment index dropped for the second straight month from its August peak with the release of (preliminary) October 1999 data. The Connecticut leading employment index, after absorbing a large drop in September 1999, rebounded with the October release, recovering fully the September decline. Nonetheless, the leading index still falls slightly below its level twelve months ago.

The coincident index, a gauge of current employment activity, fell between September and October primarily because of the increase in the unemployment rate and the declines in total and nonfarm employment. The insured unemployment rate offset these movements, somewhat, by falling.

The leading index, a barometer of future employment activity, has bounced around considerably during the last several years, but has remained in the same neighborhood since late 1996. This month's release rebounded from a substantial month-to-month decline in September. See the accompanying chart. The rebound reflects primarily the large decrease in the initial claims for unemployment insurance, which is now at its lowest level since the period August to November 1987.

Few analysts predict a downturn in 2000. Risks do exist, however. First, the labor force, which initially declined in the current expansion, has remained flat for the past few years. This trend reflects a potential roadblock to sustained growth. The current low unemployment rate implies that future growth must come primarily from an expanding labor force or continued increases in productivity. It is not clear from where new workers will come. Second, if the Federal Reserve increases interest rates in their February meeting as some analysts project, then sustaining continued growth will be more problematic at the national and state levels.

In summary, the coincident employment index rose from 97.7 in October 1998 to 100.4 in October 1999. Three components of the index point in a positive direction on a year-over-year basis with higher nonfarm employment, higher total employment, and a lower total unemployment rate. The fourth component, the insured unemployment rate, was neutral on a year-overyear basis.

The leading employment index fell from 90.1 in October 1998 to 89.6 in October 1999. Three index components sent negative signals on a year-overyear basis with a lower average workweek of manufacturing production workers, a higher short-duration (less than 15 weeks) unemployment rate, and lower total housing permits. One component sent a positive signal on a year-over-year basis with lower initial claims for unemployment insurance. The final component, Hartford help wanted advertising, was neutral on a year-over-year basis.

SOURCE: Connecticut Center for Economic Analysis, University of Connecticut. Developed by Pami Dua [Economic Cycle Research Institute; NY, NY] and Stephen M. Miller [(860) 486-3853, Storrs Campus]. Stan McMillen, Kathryn Parr, and Hulya Varol [(860) 486-3022, Storrs Campus] provided research support.

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Published by the Connecticut Department of Labor, Office of Research
Last Updated: October 15, 2002