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Connecticut Economic Digest: November 2004 issue
Connecticut Industry Employment Mid-Term Outlook to Second Quarter 2006 | Housing Update

Connecticut Industry Employment Mid-Term Outlook to Second Quarter 2006
By Daniel W. Kennedy, Ph.D., Senior Economist, DOL

The June 2004 Digest article on the Short-Term Employment Forecast for the fourth quarter of 2005 opened with the following paragraph:

"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? 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."

The above paragraph could be used, almost verbatim, to introduce the Short-Term Industry Employment Forecast to the second quarter of 2006 (2006:Q2). International risks still loom large. Since then, violence continues in Iraq, and now the uncertainty over the January elections. Afghanistan and the other cited international risks are still in the forefront, with Darfur and Nigeria added to the mix. Oil has surpassed $50/bbl, and the Gulf/Florida hurricanes, sabotage of Iraq's oil pipelines, and now Nigeria and uncertainties over Russia's oil industry all imply a continued, high price of oil for the foreseeable future. Further, natural gas supplies indicate increasing prices and trouble ahead for the winter. The upcoming Presidential and Congressional elections add even more uncertainty.

In regard to the economy itself, the question is: Has the U.S. economy experienced a 'soft patch' or a longer-term slowdown? Five months after the last forecast, the economic data still send mixed signals about where it is heading. However, when viewed from a slightly longer perspective, the data suggest a slowdown. Durable goods orders have essentially been flat over the last four months, and retail sales have been erratic. The Conference Board's (CB) Leading Index of Economic Indicators has been down for three straight months, and the Economic Cycle Research Institute's (ECRI) Weekly Leading Index, which has an eight-month lead, turned down significantly in the spring.

Forecast Assumptions and Risks

Because of the uncertainties surrounding this forecast, the assumptions and risks will be discussed at the outset, rather than at the end of this article. The underlying assumption that underpins the current forecast is that the U.S. economy, after some holiday stimulus, will enter a significant slowdown over the first half of 2005, with a re-acceleration of growth coming in the last half of 2005 into 2006. Historically, including recent history, Connecticut tends to lead the U.S. in an employment downturn, but follows the U.S. in an employment upturn, and typically experiences weaker employment growth than the U.S. during expansions, and steeper declines during recessions. It is expected that Connecticut's employment performance will continue this pattern over the forecast period.

There are significant risks to the forecast. The single most important positive risk to the forecast (i.e., the forecast will be too pessimistic) is if the recent slowdown is, in fact, a pause and U.S. economic growth not only re-accelerates in the fourth quarter of 2004, but continues expanding throughout 2005 and 2006. There are some significant negative risks to the forecast (i.e., the forecast will be too optimistic). The first is if not only do oil prices stay high in 2005, but especially if they surpass $60-$70/bbl. This, of course, would imply a worst-case scenario in Iraq following the January 2005 elections. Particularly worrisome is the U.S. Federal budget deficit in conjunction with the trade deficit; that is, the return of the Twin Deficits. If foreign investors perceive that the internal and external deficits are out-of-control and decide to pull out of U.S Capital Markets, en masse, the dollar would free-fall, long-term rates would spike, and import prices would soar sparking inflation. A final risk, unique to Connecticut, would be the devastating effects of the closing of the Groton Sub Base in 2005.

Outlook for Connecticut Employment to 2006:Q2

The previous forecast (2003:Q4-2005:Q4) projected modest growth for 2005. It was expected that growth would be strong in the first half of 2005 and slower in the second half. The current forecast also foresees slow-to-modest growth in 2005. However, the sequence is reversed. As discussed above, it is expected that there will be a significant slowdown in the first half of 2005, with growth resuming in the second half of the year. The current forecast calls for the net creation of less than 10,000 jobs by the Connecticut economy between the second quarter of 2004 (2004:Q2) and the second quarter of 2006 (2006:Q2). Only 2,000-3,000 of those jobs will be created between 2004:Q2 and 2005:Q2. The remaining additional 7,000-8,000 jobs should be created between 2005:Q2 and 2006:Q2. The last half of 2006 could be much stronger, but it is beyond the current forecast horizon. The following discussion is based on the results presented in Table 1 on page 3. Finally, it should be noted that the employment levels for 2004:Q2 are estimates and subject to revision. Thus, the emphasis will be on the changes, and not the levels of employment.

The pace of job-loss in the goods-producing segment of Connecticut's economy is projected to drop by half over the eight-quarter forecast horizon. That translates into an expected decline of 9,300 jobs. And, reversing a net loss of 6,200 jobs over the 2002:Q2-2004:Q2 historical period, the service-providing segment is expected to add 18,900 jobs between 2004:QQ2 and 2006:Q2. The net result is an addition of 9,600 jobs to Connecticut's economy between 2004:Q2 and 2006:Q2.

The Goods-Producing Segment Slows Its Slide

As mentioned above, the goods-producing segment is expected to lose 9,300 jobs over the eight quarters between 2004:Q2 and 2006:Q2-less than half of the 20,700 jobs shed over the 2002:Q2-2004:Q2 period. Doing its part to stem the slide, construction is expected to recover somewhat over the forecast period and add 1,300 net new jobs, regaining most of those lost over the last historical period. Manufacturing will continue to shed jobs over the forecast period, as productivity continues to suppress the need for new workers in the face of moderate demand. However, losses will be cut in half compared to the 2002:Q2-2004:Q2 period. Manufacturing is projected to have a net decline of 10,600 for the forecast period. Though non-durable goods will have smaller losses, it is durable goods employment that is expected to significantly stop some of the bleeding of jobs. Both relative and absolute job-declines over the forecast period are projected to be half what they were over the previous period. Though still the biggest loser, computer and electronic manufacturing is expected to reduce its losses from 3,000 (between 2002:Q2 and 2004:Q2) to less than 2,000 over the forecast period. Also, transportation equipment, helped by increased defense and homeland security expenditures, is projected to cut its net decline in jobs from 2,700 (2002:Q2-2004:Q2) to under 1,000 between 2004:Q2 and 2006:Q2.

Service-Providing Sector Jump-Started

If Connecticut is going to create jobs it must jump-start service sector job-growth. Between 2002:Q2 and 2004:Q2, the service-providing sector had a net decline of 6,200 jobs. Even though employment grew in the previous period (2000:Q2-2002:Q2), the increase was an anemic 3,300. The current forecast is actually quite optimistic about the prospects for service sector job-growth. The service-providing segment of Connecticut's economy is expected to add 18,900 net new jobs between 2004:Q2 and 2006:Q2. Graph 1 on the front page depicts the creation, destruction, and net job-formation of service-providing jobs over three historical periods and the forecast period. It should be noted that the job creation/destruction depicted in Graph 1 is at the NAICS sector level, and not at the firm level.

As the graph shows, no subsequent period has matched the nearly 64,000 net new service jobs created during the Boom-Bubble, nor is that likely to be repeated this decade. The forecast's expected creation of 23,400 jobs is the second highest after the 1998-2000 Bubble period, and the projected job-destruction of 4,500 is also the lowest for the post-Bubble era. Finally, the forecasted net-gain of 18,900 jobs is also the highest for the post-Nineties period.

Two-thirds of the service-providing segment's new jobs will be created in the same four sectors that have pretty much been the source of job creation throughout this job-losing decade. Driven by demographics, the health care and social assistance industries are expected to add 6,700 new jobs between 2004:Q2 and 2006:Q2. Eighty-seven percent of this sector's job-growth will come from the health care part. Further, more than 48% of the job growth in health care will come from two sources: nursing and residential care facilities (+1,500) and offices of physicians (+1,300). Driven by cultural and life-style changes, accommodation and food services is forecasted to add 3,300 new jobs.

The next highest contribution to job creation is expected to come from public administration. Employment growth of 3,300 is projected to be driven by demographic pressures, and Federal mandates, to hire more teachers in the local public schools. However, budget constraints could temper some of that growth. Also, the State of Connecticut is currently re-hiring many recently laid-off workers. This should continue, but at a slower pace. Finally, since the Indian Tribes are classified under local government, employment expansion at the casinos is counted under public administration. Private educational services is also expected to add another 2,600 jobs over the forecast period. Arts, Entertainment, and Recreation is the only other service industry projected to add more than 2,000 jobs by 2006:Q2.

The forecast also calls for 4,500 service-providing jobs to be lost between 2004:Q2 and 2006:Q2. Two sectors, that are expected to account for 77% of the projected job losses, have been shedding jobs since the bursting of the bubble. Administrative support/waste management is expected to shed another 2,200 more jobs over the eight quarters between 2004:Q2 and 2006:Q2. Professional, technical, and scientific services is also forecasted to continue its decline, with employment declining by 1,200. Sectors that are expected to decline, but by less than 1,000 jobs, include utilities, wholesale trade, and information. Though still shedding jobs from the bursting of the bubble, the losses in the information sector are expected to slow over the forecast period.

For the unabridged 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
September Permits Highest Since 1988

Commissioner James F. Abromaitis of the Connecticut Department of Economic and Community Development (DECD) announced that Connecticut communities authorized 1,121 new housing units in September 2004, a 25.5 percent increase compared to September of 2003 when 893 units were authorized.

The Department further indicated that the 1,121 units permitted in September 2004 represent a 2.0 percent increase from the 1,099 units permitted in August 2004. The year-to-date permits are up 21.0 percent, from 7,269 through September 2003, to 8,797 through September 2004.

The New Haven Labor Market Area showed the largest increases in terms of units (112) and percentage growth (110.9) compared to a year ago. New Haven led all municipalities with 79 units, followed by Simsbury with 67, and Meriden with 52. From a county perspective, only Hartford County showed a year-to-date loss.

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Last Updated: December 1, 2004