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Connecticut Economic Digest: June 2000 issue
Keep Connecticut's Home FIRE Burning | Industry Clusters | Housing Update | Coincident Index Explores Uncharted Waters

Keep Connecticut's Home FIRE Burning
By Linc Dyer, Economist

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.

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Industry Clusters
Bradley at Crossroads

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.

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April Permits Down 10.2% from Last Month

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.

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Coincident Index Explores Uncharted Waters
By Joseph Slepski, Research Analyst

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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Last Updated: October 6, 2005