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Connecticut Economic Digest: October 1997 issue
Earnings by Industry in the Nineties | Leading Index Undergoes Minor Revision | Housing Update

Earnings by Industry in the Nineties
By Daniel W. Kennedy, Ph.D., Associate Analyst, DOL

arnings by Industry has rarely been the focus of E attention by commentators and analysts of Personal Income. This is not to be confused with the industry earnings of individual, publicly traded corporations reported by the financial press, tracked by rating and financial analysis companies, such as Standard & Poor, and whose quarterly performance is eagerly anticipated by investors. Earnings by industry is another perspec-tive on the com-position of the Personal Income series published by the Bureau of Economic Analy-sis (BEA), which is the income received by persons from all sources, where persons are defined as individuals, nonprofit institu-tions that serve individuals, private noninsured welfare funds, and private trust funds. The usual sources of Personal Income (PI) that are followed are Wages and Salaries (W&S); Dividends, Inter-est, and Rent (DIR); and Transfer Payments. This article, however, takes the perspective that many insights into the expected growth and volatility in Connecticut's income performance may be overlooked due to the lack of awareness of the affect of industry-related earnings on Total PI.

The basis for the presentation of earnings by industry is Earnings by Place of Work. Earnings by Place of Work is the core compo-nent of PI before adjustments are made for Personal Contributions to Social Insurance and for Resi-dence, and before adding in DIR and Transfer Payments, to obtain the residence-based Total PI. Earnings by Place of Work is income earned by persons em-ployed (or self-employed) in Con-necticut, irrespective of their state of residence and is composed of Wage and Salary Disbursements, Other Labor Income, and Propri-etors' Income (both farm and nonfarm). In the aggregate, Earn-ings by Place of Work and Earn-ings by Industry are the same; the terms may be used interchange-ably depending on the components of earnings being observed.

The discussion below concen-trates on the growth of Earnings by Industry from the fourth quar-ter of 1990 (1990:Q4) to the fourth quarter of 1996 (1996:Q4), the period covered by the estimates and revisions published in the April 1997 BEA release of State Quarterly Personal Income. All values are in current dollars. The analysis is focused on the Standard Industrial Classification (SIC) division level, since quarterly data only provides earnings at the industry division level. In Septem-ber 1997, BEA released newly updated and revised annual Personal Income data through 1996, which will include earnings down to the two-digit SIC level. A follow-up article including this new information, and extending this analysis to the detailed, two-digit industry level may be the subject of a future issue of the Digest.

All absolute and relative changes in the following discus-sion are from the fourth quarter of one year to the next, reflecting Year-to-Year (YTY) changes, unless otherwise stated. Also, since the quarterly PI series is published in quarterly, annualized form, the changes discussed in this analysis will be on the same basis.

For the 1990:Q4-1996:Q4 comparison period, growth in Wages and Salaries lagged behind Proprietors' Income and Other Labor Income, which both grew faster than Wages and Salaries and overall Earnings by Place of Work. This trend has, of course, been well documented over the last couple of years. However, Wages and Salaries seem to have broken out of their dol-drums over the last year or so. Thus, the stagnation in growth may have been broken.

To put the trends discussed here in perspective, recall that in 1990:Q4, Connecticut was well into the Great Recession and had already shed 75,200 jobs from the average quarterly, seasonally adjusted nonfarm employment level of 1.672 million for 1988:Q4. As of 1996:Q4, all of the nonfarm employment lost during the reces-sion still had not been recovered, although job growth in 1996 turned in the best performance of the decade so far.

Performance of the Private Nonfarm Industry Divisions

Table 2 on page 3 presents the nine industry divisions that make up total Private Nonfarm Earnings, or simply Private Earnings. Divi-sions in boldface grew faster than overall Private Earnings. Though small industry division in Con-necticut, earnings in the Agricul-tural, Forestry, and Fishing divi-sion grew the fastest at nearly 46% between 1990 and 1996. The second largest growth rate was that of the Services division at almost 42%. Services also had the largest share of Private Earnings both 1990:Q4 and 1996:Q4. Mining, another small industry Connecticut, turned in the third best performance at just under 34%. The Nondurable Goods subsector under the Manufactur-ing division and the Transporta-tion and Public Utilities (TPU) division, with growth rates of around 31%, also grew faster than overall Private Earnings over the 1990-96 comparison period. The remaining divisions, including Durable Goods under Manufactur-ing, all grew more slowly than overall Private Earnings, although the Finance, Insurance, and Real Estate (FIRE) division, for all practical purposes, grew at about the same rate as overall Private Earnings.

Connecticut Private Earnings: 1990 to 1996

The seven SIC divisions that accounted for 99% of Connecticut Private Earnings in 1996:Q4 are depicted in Table 3. The fourth-quarter, Year-to-Year (YTY) percent change beginning with 1990-91 and ending with 1995-96 are presented for each of the seven divisions and Total Private Earn-ings. The bottom row of Table 3 gives the range of the percent changes over the six-year period. The range is the difference be-tween the highest and lowest values. It will serve as a quick and simple indicator of the variation in growth rates of over the 1990-96 period. The higher the value of the range, the larger the variation in the YTY fourth-quarter growth rates and the more volatile the growth performance. Conversely, a small range value indicates a more consis-tent and steadier growth rate over the 1990-1996 period. The range of 8.2 percentage points for Private Earnings will be compared against the range values for the industry divisions to determine whether or not a given division experienced more or less volatile growth over the period, relative to overall Connecticut Private Earnings.

Volatility in Private Earnings

As is evident from Table 3 on page 4, with a range of 39.3 percentage points, the Finance, Insurance, and Real Estate industry division has had the most volatile growth in earnings over the 1990-96 period. This industry division experienced growth as high as 28.3% over the 1991-1992 period, exceeding that of any other division, and losses as large as 11.0% for the 1993-1994 period; again, no other division suffered big a decline in earnings from one period to the next. The swings in the growth rates of annualized earnings for FIRE were large enough to significantly affect total Private Earnings for Connecticut in at least three instances. For the 1991-1992 period, the annualized increase in private earnings was $4.5 billion. Eighty percent, or $3.6 billion of that in-crease, was accounted for by two industry divisions: FIRE and Services. Fur-thermore, more than one-half of the increase ac-counted for by these two divisions was that of FIRE. Though the FIRE division accounted for 12.5% of Connecticut Private Non-farm Earnings for 1991:Q4 (compared to Services which accounted for 30.1% of total private earnings), it contributed 41.4% of the annualized growth in private earnings over the 1991- 1992 period. For the 1992-1993 period, more than one-half of all the annualized gain in private earnings for Connecticut was accounted for by FIRE. On the other hand, large losses in the FIRE division could also signifi-cantly dampen overall private earnings for Connecticut. For instance, healthy gains in private earnings for Construction, Retail Trade, Services, and TPU were off-set by a $1.03 billion, or 11.0% annualized decline in earnings for FIRE over the 1993-1994 compari-son period.

The next most volatile track record in earnings is that of the TPU division with a range value 17.9 percentage points. TPU's earnings grew by 14.3% over the 1994-1995 period, and then suffered its only decline in earnings (-3.6%) over the 1995- 1996 period. Up until 1994, the annual growth in earnings for TPU was relatively stable with a range value of 3.9 over the 1990-91 to 1993-94 period, much lower than the 8.2 range value for total Private Earnings.

Wholesale Trade, the division with the next most variation in its earnings growth, has a range value of 13.9. This division experienced ups and downs in earnings be-tween the 1990-91 and 1993-94 periods, then had a 10.6% spurt in growth over the 1994-95 period, followed by a modest 4.7% growth in earnings for 1995-96. Though displaying some variation over the entire period of analysis, the Wholesale Trade division certainly has not displayed the extreme volatility characterized by the FIRE Division.

Construction's variation in earnings growth has a range of 13.0. The 5.7% decline in earnings from 1990-91 clearly reflects the collapse of the real estate bubble in Connecticut and New England. The remainder of the comparison periods show an up-and-down pattern for earnings growth. Earnings increased 7.3% in 1993- 94 followed by a 4.5% decline in 1994-95, then a 6.5% spurt in growth for 1995-96. Nevertheless these swings in growth do not approach the magnitudes of those for FIRE, Wholesale, and Services.

Both the Retail Trade and Services range values are fairly close to that for all Private Earn-ings. If the 3.2% decline in earn-ings for Retail between 1990 and 1991 (coinciding with the period in which Connecticut experienced its largest contraction of employment during the 1989-92 Recession) is removed, the range value for Retail Trade drops to 4.8 percentage points. Earnings in Services grew at 4.0% or more from the 1991-92 to 1995-96 comparison periods. It grew 2.0% over the 1990-91 period.

The most stable growth record is that of Manufacturing with the lowest range value of all the divisions, at 4.6 percentage points. Manufacturing suffered a 1.0% loss in earnings over the 1992- 1993 period. Its earnings-growth was positive, but flat, for the remainder of the analysis periods, exceeding 3% only once (1994- 1995). Manufacturing continued to shed employment over the 1990-91 to 1994-95 periods of analysis. Then, over the 1995-96 period, the Manufacturing division gained one-quarter of a percent in em-ployment, the first increase (re-gardless of how small), in 13 years.

Finally, just to ensure that growth phenomena specific to the 1990-96 year-to-year analysis not skewing the results, the range based on the quarter-to-quarter percent changes for all 27 quarters of the data-series were calculated. There is a slight realignment of rankings when going from the fourth quarter, year-to-year changes to the quarter-to-quarter changes over all 27 quarters. Notably, TPU drops from second fourth, and Manufacturing drops from fifth to seventh. Even more notable is the FIRE division's maintaining its strong number ranking in earnings volatility.

Implications for Connecticut

A significant insight gained by this perspective on Personal Income is the volatile behavior of earnings in the FIRE division. It is this focus on industry earnings that has revealed the dispro-portionate influence that FIRE has had on the performance of private earnings in Connecticut during the nineties. Furthermore, in 1996:Q4, FIRE accounted for 9.1% of U.S. Private Earnings and 11.1% of private earnings for New England, but it accounted for 13.1% of private earnings for Connecti-cut. Thus, this volatile division has a greater impact on Connecticut's private earnings performance than it does on that of the U.S. or New England. Obviously, this would be of interest to those who depend upon the forecast of expected Personal Income for projecting expected income tax revenues and, since Disposable Income is derived from PI, for forcasting sales tax revenues, as well. Others, too, like marketers and corporate planners have a need to know, not only the level and growth in income of an area for forecasting revenues, targeting sales, or for contem-plated expansion, but equally as important, they must consider the stability of that income growth.

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Leading Index Undergoes Minor Revision

This report marks a slight revision in the Connecticut T leading employment index. The Connecticut Department of Labor stopped seasonally adjusting the average workweek of manufactur-ing production workers in 1997 because the seasonal factors were not too large. Nevertheless, we replaced this series with the seasonally adjusted series pro-duced at the Federal Reserve Bank of Boston. This substitution of data introduces small adjust-ments in the series prior to 1997, since the two seasonally adjusted series have small differences due to differing methods of seasonal adjustment. Nevertheless, this substitution does not alter the basic movement of the leading index. That is, the leading index displays the same general pattern of movement over time.

The Connecticut coincident employment index, a barometer of current employment activity, reached another new peak in the current expansion with the release of the (preliminary) July data. In addition, the recent upward movement in the coinci-dent index (see chart) continues to accelerate when compared to its negligible growth early in the current recovery. The coincident index shows no sign of slowing turning in the near future. The coincident index, by its very nature, however, does not provide a signal in advance about the turning of the economy. This is the task of the leading index.

Connecticut's leading employment index, a barometer of future employment activity, continues its see-saw upward movement, reaching its peak in the current expansion this month. The leading index possesses less upward momentum than the coincident index. It is a down-ward movement in the leading index, however, that signals the next downturn in the Connecti-cut economy. To date, that signal has not surfaced, even though the leading index exhibits less strength than the coincident index. A careful monitoring of future movements of the leading index merits our attention.

In summary, the coincident employment index rose from 85.4 in July 1996 to 92.6 in July 1997. All four index components continue to point in a positive direction on a year-over-year basis with higher nonfarm em-ployment, higher total employ-ment, a lower insured unemploy-ment rate, and a lower total unemployment rate.

The leading employment index rose from 88.2 in July 1996 to 90.0 in July 1997. Four index components sent positive signals on a year-over-year basis with a lower short-duration (less than 15 weeks) unemployment rate, higher total housing permits, lower initial claims for unemploy-ment insurance, and higher Hartford help-wanted advertising. Finally, the average work week manufacturing production work-ers remained unchanged on a year-over-year basis.

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Housing Update
August: Housing Permits Increase

Newly-appointed Commissioner James F. Abromaitis of the Connecticut Department of Economic and Community Development announced that Connecticut communities authorized 792 new housing units in August 1997, an 11.5% increase compared to August of 1996 when 710 were authorized.

The Department further indicated that the 792 units permitted in August 1997 represent a decrease of 9.1% from the 871 units permitted July 1997. The year-to-date permits are up 26.7%, however, from 4,955 through August 1996, to 6279 through August 1997.

" The significant increase the year-to-date numbers is encouraging sign that the hous-ing sector is catching up with rest of Connecticut’s economic recovery," Commissioner Abromaitis said. "Of all the recent indicators of a growing economy, the increase in permits is one of the strongest."

Reports from municipal officials throughout the state indicate that Litchfield County with 69% showed the greatest percentage increase in August compared to the same month a year ago. Hartford County followed with a 28% increase.

Hartford County documented the largest number of new, authorized units in Au-gust with 183. Fairfield County followed with 166 units and New Haven County had 131 units. Litchfield led all Con-necticut communities with 68 units, followed by Danbury with 54, and Southington with 22.

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Last Updated: October 28, 2002