All of the job loss will appear in manufacturing employment, down from 263.3k in 2000 to 243.2k in 2002
Section 1 – Executive Summary of the NEEP
Forecast for Connecticut
Current Conditions in the Connecticut Economy to
September 2002
The state appears to have emerged from a very mild contraction caused by the Federal Reserves’ hike in interest rates from June of 1999 through May of 2000 and the disruptive effects of the 9/11/01 terrorist attack on the World Trade Center. Total nonag jobs averaged 1,676,700 in 2:02, up from 1,672,300 in 4:01. However, the gain has not been sustained into the first two months of 3:02, where jobs have averaged 1k lower. The snails pace of CT job creation mirrors that of the national recover, and there is little expectation of meaningful job growth through the remainder of 2002. Six of ten CT labor markets had an August 2002 job count below that of August 2001, on a non-seasonally adjusted basis (nsa). The largest losses were –11.2k in Hartford, -4.4k in Bridgeport and –3.6k in Stamford. Nine of the 10 showed a job loss from July to August. The CT unemployment rate for 2002 rose gradually from 3.5% in January to 4.0% in August, when 67.9k state workers were listed as unemployed. But CT still has the lowest unemployment rate in the Northeast and it is well below the U.S. rate of 5.7%. The low rate is partly the result of CT having the lowest rate of labor force increase (0.2%) in the Northeast over the past year, well below the 0.9% national figure. Manufacturing activity is weaker with hours worked, weekly earnings and industrial electricity sales all belo the August level for 2001. Lastly, average weekly initial claims for unemployment compensation have averaged above 5k for most of 2002, but dipped to 4,794 in August. This was some 250 claims below the total for august 2001, and well below the peak of 6,054 registered in October 2001. Overall, the state’s actual economic performance through August supports the view that the CT recovery has either stalled, or is at best allowing only a glacially slow pace for expansion.
The forecast data in TABLE 1 paints a picture of a generally stagnant CT economy for all of 2002. While the state has emerged from a mild recession the strength of the recovery has begun to peter out in early portion of the year’s second half. Total employment, at 1.676 million, should average some 7k jobs below the figure for 2001. All of the job losses should be in manufacturing, down by 10.8k positions to 243.2k jobs. This decline in jobs will lead to an almost undetectable $200 million rise in real personal income to $130.6 billion. Population growth will continue at a snails pace, with the number of residents up by only 9k to 3.436 million. Any further gains will be hindered by the long-term trend towards net outmigration, which should cost the state some 3,300 persons lost net in 2002. On the plus side, new home permits are expected to rise by 500 units to 9,761, while real gross state product will climb by almost $4 billion to $154.4 billion. Perhaps the most disturbing statistic in the decline in the labor force by 4k individuals to 1.714 million. While the labor force does tend to contract in a downturn, the absence of new works will significantly retard the pace of any CT expansion.
TABLE 1
CONNECTICUT
FORECAST SUMMARY
NEEP HISTORY
AND OUTLOOK 2002-2006
CT
Economic Indicator 2001 2002 2003 2004 2005 2006
=============================================================
Gross
State Product (Bil. $96)
NEEP 10/02 150.8 154.4 158.4 164.3 168.5 174.2
Economy.com 9/02 150.8 154.5 158.3 164.0 168.1 173.8
NEEP 5/02 155.8 159.0 165.3 170.2 175.3 180.5
Total
Nonagricultural Employment (000’s)
NEEP 10/02 1,683 1,676 1,689 1,723 1,742 1,755
Economy.com 9/02 1,683 1,676 1,687 1,718 1,736 1,749
NEEP 5/02 1,683 1,675 1,697 1,722 1,733 1,745
Total
Manufacturing Employment (000’s)
NEEP 10/02 254.0 243.2 244.7 247.6 247.2 247.2
Economy.com 9/02 254.0 242.8 243.4 246.1 245.4 245.0
NEEP 5/02 254.0 244.6 248.7 250.8 250.1 249.4
Labor
Force (000’s)
NEEP 10/02 1,718 1,714 1,722 1,737 1,751 1,764
Economy.com 9/02 1,718 1,712 1,717 1,729 1,741 1,752
NEEP 5/02 1,718 1,716 1,726 1,732 1,740 1,749
Unemployment
Rate (%)
NEEP 10/09 3.3 3.9 3.7 3.3 3.2 3.3
Economy.com 9/02 3.3 3.8 3.5 3.0 2.8 2.8
NEEP 5/02 3.3 4.1 3.5 3.1 3.1 3.1
Personal
Income (Bil $96)
NEEP 10/02 130.4 130.6 132.1 134.9 137.4 140.1
Economy.com 9/02 130.4 130.6 132.0 134.6 137.0 139.7
NEEP 5/02 133.7 133.3 134.7 137.4 139.8 142.3
Population
(mil)
NEEP 10/02 3.427 3.436 3.442 3.447 3.453 3.459
Economy.com 9/02 3.427 3.436 3.441 3.446 3.450 3.455
NEEP 5/02 3,426 3,436 3,442 3,445 3,450 3,455
Net
Migration (000’s)
NEEP 10/02 -1.0 -3.34 -5.44 -5.79 -4.79 -5.36
Economy.com 9/02 -1.0 -3.6 -6.1 -7.4 -6.1 -7.0
NEEP 5/02 N.C. -3.2 -6.1 -6.8 -5.5 -6.6
Total
Housing Permits
NEEP 10/02 9,290 9,761 8,923 9,296 8,941 8,939
Economy.com 9/02 9,290 9,749 8,747 9,284 8,918 8,883
NEEP 5/02 9,011 8,818 8,971 8,831 8,872 8,912
For 2003, the NEEP forecast is just a bit stronger than the baseline estimates provided by Economy.com. Most of the difference is associated with the slightly faster expansion in the labor force of 5k persons expected by NEEP, as opposed to Economy.com. More potential workers will allow for a greater rise in employment of 13k jobs to a total of 1.689 million. The unemployment rate should fall slightly from 3.9% in 2002 to 3.7% in 2003. Despite the improved employment outlook, net outmigration is expected to rise to almost 5.5k persons. Gross output should again rise by $4 billion, while real personal income may show a gain of $1.5 billion. Rising interest rates will put a damper on new home permits with the total falling by some 750 units to 8,923.
The recovery should pick up some momentum in 2004, fed by relative monetary ease, the revival of capital investment expenditures and the local effects of slightly higher defense expenditures. Job gains could amount to 34k new positions in 2004, with another employment rise of 19k being recorded in 2005. Tight labor markets will limit the job gains to 13k in 2006. The unemployment rate is scheduled to drop to 3.3% in 2004 and fall further to 3.2% in 2005. Gains in Real GSP will average $4 billion per year to 2006. Manufacturing employment should stabilize at slightly more than 247,000 workers as the national economy rebounds and defense expenditures begin to rise in the state. Overall, the NEEP outlook is slightly stronger than the baseline forecast. Almost all of this optimism is based upon the assumption that the number of persons in the labor force will show steady growth of some 13k persons per year. Slower labor force growth will limit the ability of the actual figures to reach the projected totals.
The Connecticut state budget is on track to register its second consecutive fiscal year deficit, which was projected to be $390.1 billion as of September 2002. This figure was up by $29 billion from the August estimate. If a similar absolute monthly deficit increase is recorded in each of the last nine months of the fiscal year, the deficit would reach the $650 million level. Because the deficit is in excess of one percent of the fund’s appropriations, the Governor is required by law to submit a deficit mitigation plan to reduce the deficiency by at least $35 million. In fiscal 2001-2002, the state’s General Fund deficit was $817.1 million, or a little more than six percent of total expenditures. Income tax revenue was down by 10.1 percent while corporate tax revenues were off by 30.8 percent. Realized revenues were also below budgeted estimates for Sales and Use taxes, Inheritance and Estate taxes, and the tax on oil companies. Liquidating the state’s entire “rainy day” fund of $594.7 million, and rolling $222.4 million into the next fiscal year covered the deficit. The latter portion of the deficit is to be financed by the sale of optimistically named “Economic Recovery Notes”. Neither of these options is a viable alternative to cover the current deficit. The anticipated fiscal 2002-03 deficit is the result of three forces. Agency spending deficiencies total $74 million, and are mostly associated with higher retirement, social or health care spending. General Fund lapses that require meeting unattainable targets for cuts in spending. And lastly, shortfalls in various tax revenue estimates, which are down and average of –1.3% through August.
The NEEP Connecticut baseline forecast, shown in Table 1, is dependent upon the U.S. macroeconomic cyclical projection developed in March 2002 by Economy.com. Key portions of this macro simulation are displayed in Table 2 below. These projections help to determine the initial path for the Connecticut forecast. In general, the 9/02 macro forecast anticipates a slower job recovery, lower interest rates and slower gains in equity values than were anticipated by the 3/02 forecast. The macro simulation embodies the following Economy.com judgmental assumptions, offered by their chief economist Dr. Mark Zandi. First, the posture of monetary policy will remain unchanged through the remainder of 2002 and well into 2003. At that point, the Fed will begin to boost rates slightly. Current policy is highly stimulative, with a total of 11 cuts made in the Fed Funds rate during 2001 for a total 4.75%. He feels that monetary policy will not be eased further unless the recovery in completely short-circuited. When the momentum of the
Key Indicators
U.S. Macro Forecast
September 2002 vs.
March 2002
U.S. Macro IndicatorEconomy.com Forecasts |
2001 |
2002 |
2003 |
2004 |
2005 |
Gross Domestic Product % 9/02
|
0.3 |
2.3 |
3.1 |
3.8 |
2.9 |
|
3/02 |
1.2 |
1.8 |
4.0 |
3.2 |
|
|
Consumer Price Index % 9/02 |
2.8 |
1.5 |
1.9 |
2.3 |
2.4 |
|
3/02 |
2.8 |
1.4 |
2.3 |
2.3 |
|
|
Total Employment % 9/02 |
0.2 |
-0.8 |
1.0 |
2.3 |
1.6 |
|
3/02 |
0.4 |
-0.6 |
1.8 |
2.2 |
|
|
Unemployment Rate % 9/02 |
4.8 |
6.0 |
6.1 |
5.7 |
5.4 |
|
3/02 |
4.8 |
5.9 |
5.6 |
5.4 |
|
|
Housing Starts (mil) 9/02 |
1.6 |
1.65 |
1.51 |
1.62 |
1.57 |
|
3/02 |
1.61 |
1.52 |
1.60 |
1.57 |
|
|
Net Exports ($Bil) 9/02 |
-415.9 |
-482.3 |
-503.6 |
-515.9 |
526.0 |
|
3/02 |
-410.2 |
-444.1 |
-454.7 |
-458.7 |
|
|
Federal Funds Rate % 9/02 |
3.89 |
1.74 |
2.65 |
5.0 |
5.25 |
|
3/02 |
3.89 |
1.86 |
3.83 |
5.20 |
|
|
Treas-Bond Rate 10-yr % 9/02 |
5.02 |
4.85 |
5.31 |
5.87 |
5.82 |
|
3/02 |
5.02 |
5.15 |
5.37 |
5.83 |
|
|
S&P 500 Stock Average 9/02 |
1,192 |
1,025 |
1,145 |
1,259 |
1,313 |
|
3/02 |
1,192 |
1,272 |
1,344 |
1,390 |
|
|
Oil West Texas ($/Bbl) 9/02 |
25.90 |
25.60 |
28.60 |
26.70 |
24.30 |
|
3/02 |
25.90 |
24.80 |
28.90 |
25.70 |
|
recovery is assured, the Fed will begin to raise the federal funds rate in 2004 towards the 5% level, which is consistent with the same rate of nominal growth in GDP.
Third, the trade value of the dollar has weakened as a result of the growing deficit in U.S. net exports and the persistent decline in U.S. equity markets. Strong U.S. productivity growth, along with a low rate of consumer price inflation, will eventually allow firms to rebuild their profitability, leading to improved returns to investments in both stocks and bonds. However, the export deficit will only be corrected by further declines in the value of the dollar. The cheaper dollar will allow U.S. firms to sell more products in foreign markets and to better compete domestically with more expensive imports. U.S. multinational firms will see some positive effects on profits, as foreign earnings are translated using the weaker dollar to calculate consolidated profit reports.
Lastly, the beneficial decline in energy prices is over. Recent Middle East turmoil briefly pushed the price of a barrel of oil above $30. Oil prices are projected to remain in the $25-$30 range for most of the near term, with the potential risk of an upward spike as a consequence of an invasion of Iraq. Higher gasoline and industrial fuel prices could act to cool the expansion for a number of reasons. First, higher energy prices act like a tax, siphoning purchasing power from the hands of consumers. Second, higher jet fuel prices will lead to a rise in airline fares, limiting the ability of that key sector to recover from the events of 9/11. Third, higher energy prices will feed into manufacturing costs, raising product prices or limiting the growth in business profits. Lastly, higher gasoline prices may cut into the sales of new vehicles, especially the high profit margin SUVs.
The data in Table 3 indicate that CT economy lost 28,900 jobs in the downturn from July 2000 to December 2001. The state has registered barely any gain in jobs since that time. Moreover, the unemployment rate remains at the peak value of 4% as of August 2002. Admittedly, this is a low number and would be welcome under most circumstances. However, it has at least in part been sustained by the decline in the size of the CT labor force, which stands at 1.718 million, down from the peak of 1.753 million in July 2000. This decline in the number of available workers poses a threat to the pace of any state recovery that might be felt in 2003 or 2004. On the plus side, average weekly new claims for unemployment insurance have dropped below 5k, while the average number of weekly hours worked in manufacturing has risen back to 42.0 hours. The fall in new claims supports the view that the CT economy is no longer deteriorating and the rise in hours worked indicates the possibility of more business and added hiring if manufacturing activity rises further. However, there is a cautionary note to be added to both CT data estimates. CT data tends to lag the national figures, which indicate that new claims may be rising, while the level of manufacturing activity is falling. Repercussions for CT bear watching in regards to both indicators.
|
CT Economic Indicator |
Cyclical Best |
Recession Low |
Difference |
Aug 2002 |
Nonag Employment |
July 2000 1,701,000 |
December 2001 1,672,100 |
-28,900 |
1,675,400 |
|
Unemployment
Rate |
Jun-Aug 2000 2.1% |
December 2001 4.0% |
+1.9% |
4.0% |
|
Initial Wkly
New Claims
Unemploy |
Sept 2000 3,168 |
October 2001 6,054 |
+2,886 |
4,794 |
|
Labor Force |
July 2000 1,753,300 |
December 2001 1,708,800 |
-44,500 |
1,717,700 |
TABLE 4 contains a list of publicly announced labor force reductions recorded from.
Connecticut Labor
Force Reductions
|
Employer |
Industry |
No. Jobs |
Reason |
Effective To Q/Yr |
Location |
|
City of Hartford |
State + Local Gov |
57 |
Cost cut |
2/02 |
Hartford |
|
Anderson Acc. |
Business services |
311 |
Closed |
3/02 |
Hartford |
|
Aetna |
Insurance |
300 |
Cost cut |
4/03 |
Hartford |
|
SoNewEngTele |
Utility |
300 |
Cost cut |
4/02 |
Statewide |
|
Frieda Hair Care |
Chemicals |
60 |
Merger |
4/02 |
Wilton |
|
Handy & Harman |
Fab Metals |
200 |
Closed |
4/02 |
Fairfield |
|
Ames |
Retail |
1421 |
Closed |
4/02 |
Statewide |
|
Bridgeport Machines |
Electrical Equip |
140 |
Closed |
3/02 |
Bridgeport |
|
Lantronix |
Electrical Equip |
30 |
Slow Bus |
4/02 |
Milford |
|
Hassler |
Bus Services |
63 |
Relocation |
4/02 |
Shelton |
|
Howmet Castings |
Engine parts |
30 |
Slow Bus |
3/02 |
Winsted |
|
Cigna |
Insurance |
56 |
Slow Bus |
3/02 |
Bristol |
|
Bayer |
Pharmaceuticals |
450 |
Relocation |
4/03 |
West Haven |
|
Stamford Health |
Health Care |
35 |
Cost Cut |
3/02 |
Stamford |
|
Kaman |
Aerospace |
390 |
Closed |
4/03 |
Moodus |
|
Envirotest |