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 |
Emissions Test |
490 |
Closed |
2/02 |
Statewide |
|
Trilegiant |
Services |
60 |
Cost cut |
3/02 |
Trumbull |
|
Pratt & Whitney |
Aerospace |
127 |
Cost cut |
2/02 |
Statewide |
|
Computer Sciences |
Bus Services |
165 |
Cost cut |
4/02 |
E.Hartford |
|
|
|
|
|
|
|
|
Totals: |
19 Firms |
4,689 |
|
|
|
* Estimated value from public sources
April to October 2002. The largest job cut will involve the Ames Department store chain, which was headquartered in Rocky Hill. After several financial reorganizations, the firm liquidated its business in the 3rd quarter of 2002. The loss of 1,421 jobs includes the elimination of retail jobs in CT as well as the headquarters management positions. The next largest job loss was at Envirotest, which held the contract for auto emissions testing in CT. The firm lost the contract and the sites were closed as of late June 2002. A new program is being set up to conduct emissions testing at local garages, and will be in place some time in 2003. Bayer Pharmaceuticals in West Haven cut 450 positions as a result of the closing of a major production line and the relation of other activity to out of state sites. In total, there were 19 firms announcing a total job cut of 4,689 positions. Both of these numbers are smaller than the 30 firms that cut 6,421 positions as recorded in the 5/02 NEEP forecast.
TABLE 5 contains data for the labor force additions publicly announced from April to October 2002. The largest increase was reported at the Latex Foam Company in Shelton. They have relocated to that town after a fire destroyed their original plant in Ansonia. The Ansonia plant had a workforce of over 200 employees. The other two employment increases were at People’s Bank, which continues to expand its operations statewide and A.J.Wright a retail-clothing store that opened in Bridgeport. The paucity of reported employment increases misses the fact that smaller job gains are clearly taking place at individual firms. However, the public numbers are well below the 11 firms and 2,623 job additions that were announced and tabulated in the 5/02 NEEP report.
Publicly Announced
Job Additions – April 2002 to October 2002
|
Employer |
Industry |
# Jobs |
Date Q/Yr |
Location |
|
People’s Bank |
Financial |
43 |
2/02 |
Statewide |
|
Latex Foam |
Rubber & Plas |
85 |
2/02 |
Shelton |
|
A.J.Wright |
Retail |
40 |
2/02 |
Bridgeport |
|
|
|
|
|
|
|
Total |
3 Firms |
168 |
|
|
Anticipated Sequential Forecast Adjustments
The data in Tables 4 and 5 have been incorporated into the NEEP forecast. They serve as a primary source for some of the employment deviation of the NEEP forecast from the Economy.com baseline. The interactive nature of the model accounts for a significant portion of the remaining changes in employment, income and real state GSP. However, the reader is cautioned that the data represent only the best available estimates for the anticipated job changes. If actual events deviate from the assumed path, this could have a material impact on part or the entire NEEP Connecticut forecast.
The terrorist events of 9/11 appear to have had a minimal lasting impact on the CT economy as of August 2002. However, that conclusion may change a bit in the near future for four reasons. First, Congressional approval for a war with Iraq will create uncertainty at best and a disruption of U.S. economic activity at worst. Second the continued decline on Wall St is beginning to result in job losses within the financial sector that will hit residents of Fairfield County whose employment is connected to the equity markets. Also, the decline is diminishing the value of the financial asset position of CT residents, while clouding the outlook for year-end bonus payments. The loss of this income should reduce the demand for high end new homes and cut general consumer spending. Third the desire for greater national security is supporting federal defense funding for projects at key state employers including Pratt & Whitney, Sikorsky Helicopter, Electric Boat and Hamilton-Sundstrand. Lastly, the drop in wage income and equity related gains is undermining the state’s budget picture and may lead to a reduction in social service funding, higher taxes and a cut in government supported employment.
Defense funds are beginning to flow back into the state. The defense budge approved the construction of 34 Sikorsky Black Hawk helicopters at a total of $640 million. It also allocated $915 for further development of the Comanche helicopter, which is a joint program with Boeing. Sikorsky has designed its Bridgeport facilities as the site for Comanche design and construction. The firm will relocate 350 jobs to the site and hire an additional 150 technical and manufacturing workers to 2006. The army had plans to purchase 1,200 Comanche helicopters over the life of the program. However, if the weapons-procurement portion of the defense budget tightens, the Army has thought about cutting purchases to 800 helicopters. Civilian advisors look for no more than 679 purchases. The legislation also allocated some $2 billion to Electric Boat for the construction of a new Virginia Class attack submarine in cooperation with Newport News Shipbuilding, and an additional $279 million for the conversion of four Trident nuclear missile firing subs to attack configuration using conventional weapons. EB has already hired 200 trade workers in 2001 and looks to hire an additional 500 shop floor production workers in 2002.
Pratt & Whitney was awarded defense funds as the engine portion of some $5.4 billion in jet fighter purchases. The engines will outfit 23 F-22 fighters, and provide funds in support of engine development for the Joint Strike Fighter. The firm will also receive $288 million for engines associated with other military contracts including the engines for 15 C-17 transport jets. These allocations should help to keep employment at current levels while supporting parts production at Hamilton-Sundstrand, a UTC aerospace subsidiary. However, there is some concern that a portion of the P&W engine work may be transferred to a newly acquired Polish engine facility. P&W has also been awarded a $1.5 billion commercial contract to supply orders and options for 128 jet engines for the new Airbus A380-800 super jumbo jet. This contract is for planes to be purchased by the United Arab Emirates and is being shared with its partner, the jet engine division of General Electric. P&W, through its participation with Rolls-Royce in the global consortium International Aero Engines, is also in the running for the sale of up to $1 billion in engines to power the 120 Airbus A319 planes that were recently ordered by the British no-frills airline EasyJet. The principle rival to the IEA sale is CFM International, a joint venture involving General Electric and Snecma of France. The engine decision may be reached before the end of 2002. Lastly, the budget awarded $49 million to the Norden division of Grumman in Norwalk for the purchase of JS-STARS lookdown, battlefield radar.
Activity at the two Indian casinos has been brisk, with Foxwoods celebrating its 10th year of operation in 2002. The facility employs over 13,000 persons, with the Mohegan Sun casino adding another 11,000 jobs. Some 37 percent of adults from Maine to northern New Jersey have gambled at one or both of the casinos during the past year. In fiscal 2001, they contributed a combined $335 million to the state’s budget, equal to one-quarter of their slot machine net, in fulfillment of their initial agreement allowing them to open and operate in the state. Indian gaming payments to the state amounted to $36.5 million in August, up 11.2% from August 2001. For the year, payments total 256.8 million to date, up by 11.5%. Such payments, along with the real estate conveyance tax, are two of the few state revenue sources that are showing year over year gains.
These numbers can be expected to grow in the near future as the Mohegan Sun casino opened its 34-story luxury hotel and conference center in April 2002. This added approximately 350 hospitality workers to their casino labor force and will allow them to accommodate larger groups on site for extended stays. Despite some local discord, the two casinos have been, on balance, a positive force in the region. They have provided jobs for residents of CT, MA and RI, they have contributed significantly to CT state revenue inflows, they have attracted large numbers of tourists and entertainment dollars, and they have reinvested their profits back into the two facilities. The Foxwoods facility has a construction value in excess of $1.2 billion, while the Mohegan Sun footprint, when fully completed, will have a construction value of $1 billion.
Added to the above is the potential for one and possibly two Indian casinos in the near term future for CT. The Bureau of Indian Affairs approved the individual applications for federal recognition for the Eastern Pequot and Pawcatuck Eastern Pequot tribes, but recognized them as a single tribe. This will allow them to go forward with their plans for a third Indian casino. However, the creation of more Indian casinos faces opposition from both Governor Rowland and Attorney General Blumenthal. In addition, several polls indicate substantial public opposition to any further casino development, especially in Fairfield County. Here the Golden Hill Paugussett tribe with land claims in Bridgeport and surrounding communities is scheduled for a recognition decision in December 2002, while the Schaghticoke Tribal Nation’s petition for recognition is expected in October 2003. Both tribes have signaled their intention of building a casino, if and when the BIA conveys federal recognition. In addition, the BIA has received notices of intent to file a federal tribal recognition petition from at least nine other Connecticut Indian groups.
Electric power issues, especially in Fairfield County, are attracting considerable policy attention in CT. Part of the controversy involves the activation of an under sea transmission cable across Long Island Sound from New Haven harbor to Shoreham NY, which is designed to carry electric power from Canada to Long Island. The cable was laid in late spring but has yet to be activated because portions of it are too close to the water surface. The line may also have potentially adverse environmental impacts for CT with little or no gain to the State. In fact the cable could have a mild adverse economic impact creating higher electric rates for CT power purchased on the open market. The second leg of the electric power controversy involves upgrading and extending two existing power transmission lines into Fairfield County, one from the Bethel area and one from Middletown. The upgrades would triple the amount of power that could be delivered into the region from 115 kilovolts to 345 kilovolts. However, some see this as being much more additional power than the region needs. The excess capacity creates the suspicion that it too is designed to transfer more electrical power to Long Island, with the higher prices there again potentially raising the cost of electricity to CT residents and business firms.
The construction industry remains strong in CT with employment stable in the 66k range. The total value of construction contracts through July of 2002 was up 23 percent relative to July of 2001. Residential and nonresidential building contracts were substantially above year earlier levels, while nonbuilding contract awards were lower. Sales of existing homes and home prices continue to be strong in CT although the pace of new home permits has slackened somewhat in the late summer of 2002. Nationally, housing prices rose by 6.2% to a median of $148,000 in 2001. However, in parts of CT the prices increases were even greater. The median single-family sale price rose by 18.5 percent to $336,000 in Fairfield County and gained 12.2 percent to $171,900 in New Haven County. For the first six months of 2002, sales of existing homes have averaged 56.6k on an annual rate; with prices in the New Haven market up by another $19,100 11 percent to an average of $191,000. Despite the continued rise in home prices, the permit total for the first eight months of 2002 is still 0.6% ahead of that for 2001. The gain would have been larger except for a decline of 244 permits in August 2002 relative to 2001. While the August decline could signal the start of a flattening for the pace of construction, the continuance of low and falling mortgage rates may allow a few last months of gain in the permit numbers. Even though mortgage rates remain attractively low, the rise in home construction costs and land prices, along with the difficulty of securing zoning approval for new home developments have driven up the price of new homes. As income growth slows, these forces make the outlook for new home building beyond 2002 less robust than in the current year.
After several years of rising tax revenues and $600 million plus annual budget surpluses, which led to a combination of tax cuts and spending increases, the growth in revenue slowed dramatically in fiscal 2002 and led to a substantial budget deficit. Figures released by the State Comptroller’s office for Fiscal 2002 and 2003 indicate the following. For the fiscal year 2002 that ended June 30th, the state budget deficit amounted to $817.1 million. This deficit was partially covered by a one-time infusion of $594.7 million from the state’s “rainy day” fund, which completely exhausted that reserve. The remaining deficit of $222.4 million was brought forward into the fiscal 2003 budget to be financed through borrowing by use of the optimistically named “Economic Recovery Notes”. The deficit would have been over $1.1 billion in the absence of actions taken during the budget year including $254 of deficit mitigation efforts. These actions included appropriation rescissions and limits on state agency spending. Also, the state tax on cigarettes was raised by $.61 per pack on 4/1/02, which increased that revenue source by some $40.5 million. For all of fiscal 2002, General Fund spending rose by 2.5% after having achieved an annual average increase of 5.8% over the past five fiscal years. Over the past five years, departmental spending on Education, Health and Hospitals, Corrections, Judicial, Regulation and Protection, along with debt service, grants to towns and employee fringe benefits have advanced by more than 6% per year. In Fiscal 2002, revenue received fell precipitously by 9.5% including a 10.1% fall in the income tax, 4.1% in the sales tax, and 30.8% in the corporation tax. These declines are in contrast to the average annual rise of 5.6% experienced within each of the past five fiscal years.
The estimated budget gap for fiscal 2003 was approximately $1 billion. Recognizing the need for spending cuts in the fiscal 2003 budget, the state legislature reduced projected spending from $13.5 billion to $13.2 billion. The reduction was achieved through a combination of agency budget cuts and a hiring freeze. In addition, taxes were raised on cigarettes, diesel fuel and businesses. However, the diesel tax has reportedly led to a substantial decline in diesel fuel sales as interstate truckers avoid stopping in CT to refuel.
Governor Rowland vetoed the imposition of the special “millionaire’s tax” that was proposed by the legislature. This proposal would have increased the income tax rate for the 600+ state residents with an adjusted gross income of $1 million or more, and would have added approximately $160 more in state revenue. Also, scheduled cuts in the state income tax were delayed, along with some new exemptions in the state’s sales tax and the scheduled phase-out of the inheritance and gift taxes. As of October 1, 2002, the State Comptroller’s office has projected that despite these spending cuts and tax increases, there will be a deficit of $390.1 million for the 2003 fiscal year. This figure was up by $29 million relative to the deficit estimate offered in September. If this monthly deficit increase is maintained for each of the eight remaining months of the state’s fiscal year, the additional shortfall could rise by $232 million to total some $622 million. The size of this deficit means that one of the first actions taken by the gubernatorial victor in the November election will a legally mandated cut in state spending of at least $35 million.
The state deficit is high and rising do to a combination of factors. First actual state tax revenues are falling short of the budget projections. Second, additional agency spending on Medicaid, Mental Health and Addition Services, Department of Children and Families, Workers’ Compensation, State Employees Health Services and Retired State employees Health Services has amounted to $74.4 million to date. Third, there are questions surrounding the ability to achieve the aggressive General Fund lapse figure (reductions in spending from the original fiscal 2003 estimate and the previous year) totaling $251.9 million. If these cuts are not met, they will result in a further rise in the budget deficit.
The data in Table 6 show the projected percent change in various taxable income categories for CT and the US generated by the baseline NEEP employment estimates. The NEEP model is not designed to be a revenue-forecasting model for the CT state budget. However, a look at the recent historical and projected rates of change in these categories provides a rough estimate of the types of revenue increases that might be expected, as well as the amounts of additional spending that these revenues might support. The percentage growth in CT personal income has been stronger than that for
Tax Category
Calendar Year % Change – History + Forecast
|
Income Category |
2000 |
2001 |
2002 |
2003 |
2004 |
|
Personal Income CT |
6.6 |
2.9 |
1.5 |
3.3 |
4.6 |
|
US |
5.2 |
1.3 |
1.8 |
1.8 |
2.4 |
|
Wage/Salary Disbursement CT |
8.0 |
2.6 |
-0.6 |
3.5 |
6.1 |
|
US |
n.a. |
|
|
|
|
|
Dividends, Interest, Rent CT |
4.7 |
1.3 |
2.0 |
-1.8 |
-0.8 |
|
US |
10.6 |
2.4 |
1.4 |
-1.1 |
3.1 |
|
Retail Sales CT |
6.2 |
3.5 |
2.6 |
4.0 |
4.4 |
|
US |
6.7 |
3.8 |
3.5 |
4.2 |
4.9 |
|
Existing Home Sales CT |
5.0 |
-0.8 |
6.1 |
-9.0 |
2.0 |
|
US |
-0.6 |
2.6 |
3.1 |
-8.3 |
2.8 |
U.S. and will continue to behave so except for calendar 2002. However, the rate of increase is expected to be below the peak year of 2000, with the income rise in 2003 being exactly one-half of the earlier change. Wage and salary disbursements should be well below the earlier gains, with a negative number anticipated for 2002. Declining interest rates combined with continued weakness in the stock market has undermined the growth in this income category, and negative values are possible for calendar years 2003 and 2004. Together, these three income categories support the view that any gains in revenue from the state’s personal income tax will be substantially restrained.
The growth in retail sales for 2002 is estimated to be less than one-half the gain experienced in 2000. This should limit the expansion in the sales tax revenues. Interestingly, the rise in CT retail sales has been and is projected to be less than the gain experienced at the national level. CT residents must be either spending their rising incomes out of state or saving a higher percentage of their income than the national average. Lastly, sales of existing homes have been strong in CT boosted by lower mortgage rates. However, the percentage change is expected to be negative in 2003 as interest rates rise. Lower sales will cut into the flow of revenue from the state’s real estate conveyance tax. Another major source of CT revenue is from the corporate income tax. Here, the NEEP model does not allow for even a rough estimate of change. However, the lack of overall business pricing power combined with the weak national business profit picture would be consistent with a lower expected level of corporate taxes to be received by the CT state treasury. Lastly, the revenue flow from the Indian casinos appears to be stable with a modest increase possible in light of the facility expansion at the Mohegan Sun complex.
The outlook for resolving the potential deficit is cloudy at best. Demands for increased expenditures are growing, with Medicaid costs rising, and the increasing demand for state aid to fund higher elementary and secondary education costs. Also, there is an acknowledged need to find ways of reducing the exceptionally high urban tax burdens that scare away the middle class and retard local employment growth. Lastly, up to this point, CT has been aggressive in using tax dollars to attract new firms and jobs into the state. Each or all of these spending demands will be difficult to step away from. One new tax source might involve the application of the state’s sales tax to Internet sales. Despite the federal moratorium on such taxes, some states including Tennessee and Minnesota feel that they have found a way to levy the tax and stay within the federal law.
As of this writing, the stock market continues to drift aimlessly in response to lackluster earnings reports and growing concerns about the financial health of a number of major firms. Many CT residents are equity owners, with the revenue stream from capital gains and bonus income playing a considerable role in supporting consumer spending as well as the state’s budget. It will be difficult to generate continued increases in consumer spending in the absence of even small gains in equity values. Second, the Federal Reserve as remained extremely accommodative with low interest rates and generous increases in the money supply. This condition can only continue for so long before it creates concerns over the possibility for generating inflationary pressures. It is unlikely that the Fed will raise rates before early 2003 and may be forced to lower them if the holiday buying season turns out to be a major bust. However, when it does raise rates, it runs the risk of choking off what appears to be a weakening recovery. Nevertheless, an increase may be required in 2003 if the deficit in federal spending puts upward pressure on financial markets.
Third, prices for home heating oil are predicted to rise some 45% over the winter months especially if the U.S. goes to war with Iraq or there is a particularly cold winter. CT consumers and producers are heavily dependent upon petroleum products for their energy supplies. The rise in oil prices acts as a tax, taking funds from other consumer expenditures and placing CT manufacturing firms at a competitive disadvantage. Major OPEC nations have hinted that they will not use oil as a weapon in a Middle East conflict. However, new charges have arisen that point the finger of blame for recent past price increases towards the major oil refiners and traders, who may have been manipulating prices. Regardless of the outcome of these issues, the temporary uncertainty creates an unstable environment in which fragile national and state recoveries must make progress.
Third, the West Coast dock strike has slowed the unloading and distribution of goods for retail sale during the holiday season. Without goods on the shelf to sell, gross sales revenues and profit margins at national retailers will likely deteriorate. Fourth, even if the goods are on the shelves, the slow growth of consumer spending in September may be a precursor of things to come in the holiday season. Consumers have heavy debt loads and may finally be feeling the adverse effects of falling equity values. The desire to save more out of current income, and to postpone discretionary expenditures could leave retailers with excess goods and plunging prices. Fifth, consumer spending may not be buoyed as much by home refinancing as it has over the past year. Mortgage rates may decline a bit further, especially if the Fed lowers rates in early 2003. But the housing market may deteriorate somewhat if income and financial asset levels fall further. Perhaps this will be one holiday season where retailers will cut back their inventories and run the risk of missing some sales and profits, rather than be overstocked with merchandise and have to engage in drastic price cuts that will reduce both revenues and profits.
Sixth, some 46 states are experiencing approximately $56 billion in current budget gaps. Closing those gaps during legislative sessions in the first half of 2003 will mean higher taxes and less spending on social support programs at a time when more people will find themselves out of work or otherwise financially pressed. State budget remediation actions will work to slow the economy further. Lastly, a rebound in business capital spending is necessary for a recovery in equity values. However, a slowing economy, which limits the growth in business profits, combined with accounting reforms that reduce the size of reported earnings will work to slow capital spending. Until, firms see higher rates of utilization of existing capacity, based upon strong order growth, it is unlikely that they will add new production equipment. The falling trade value of the dollar may help export sales and relieve some domestic pricing pressures, but Europe and Asia remain weak and are unlikely to pull the U.S. out of its glacial pace of expansion.
The biggest wild card is the possibility of war with Iraq. This forecast makes no assumptions about the likelihood of war or its economic consequences. No one can foresee the course of military events there or the economic cost of such an undertaking. A long and costly war, combined with a prolonged and bitter period of U.S. occupation will potentially have a greater impact on the U.S. economy that the 9/11 terrorist attack.
Undoubtedly the biggest issue at the state level is the current budget process and how it will deal with the growing deficit in fiscal 2002-03 and the potential deficit in fiscal 2003-04. Whom ever is elected governor, one of their first responsibilities will be to develop a legislatively mandated deficit mitigation plan. The plan will undoubtedly involve further cuts in state spending and the potential elimination of some state jobs. It may also call for increases in taxes that could necessitate a special legislative session involving some outgoing state legislators. The shortfall in the General Fund appears to be so large and persistent that it may call for cuts in state social programs, aid to localities and educational spending. Those actions are just the opposite of what the state needs to fuel the current weak expansion. In addition, they may discourage additional business investment, as well as limit further expenditures by consumers. While the state’s financial condition is typical of the sequence of economic events that arise in a period of economic decline, the resulting tight fiscal actions tend to be pro-cyclical rather than counter-cyclical. As such, they can’t help but retard the pace and timing of the state’s recovery.
Edward J. Deak, Ph.D.
Connecticut Model Manager
The New England Economic Project
Professor of Economics
Fairfield University
Fairfield, CT 06430
1-203-254-4000 x-2866
deak@fair1.fairfield.edu