The Connecticut Economic Outlook

 1st Quarter 2002 to 4th Quarter 2006

 

Edward J. Deak, Ph.D., NEEP Model Manager, May 29,2002

 

Highlights of the Connecticut Forecast – 2002:Q1 to 2006:Q4

 

 

 

 

 

 

 

 

 

 

 

Section 1 – Executive Summary of the NEEP Forecast for Connecticut

 

Current Conditions in the Connecticut Economy

 

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 1,675,033 in 1:02, up from 1,672,300 in 4:01.  However, the gain was supported by some unusual seasonal adjustments to trade and government employment in January 2002.  The March employment numbers fell broadly by 3,300 positions to 1,672,500, matching the count for October to December 2001.  Therefore, the best that can be said about the job creating power of the current recovery is that employment in 1:02 is flat or up very slightly from 4:01.  Six of ten CT labor markets had a March 2002 job count below that of March 2001, on a non-seasonally adjusted basis (nsa).  However, seven of ten showed an improvement in the job count (nsa) from February to March 2002.  The CT unemployment rate has led steady at 3.5% throughout 1:02, which is down from the 3.9% average for 4:02.  All ten labor markets showed a rise in the nsa unemployment rate in March 2002 vs. a year ago.  However, all ten showed a lower rate in March than in February 2002.  Four labor markets showed a rise in average nsa manufacturing hours worked in March 2002 vs. 2001.  While six markets showed a rise in hours vs. February 2002.  Lastly, average weekly initial claims for unemployment compensation continued to decline in March, averaging 4,764.  This was the lowest total since the peak of 6,054 in October 2001 and almost exactly matched the figure of 4,761 recorded in March 2001.  Overall, the state’s actual economic performance through mid-April, supports the view that CT is slowly emerging from a very mild downturn. 

 

The Connecticut Outlook 2002 – Picking turning points is tricky business

 

The forecast data in TABLE 1 paints a picture of a mild expansion for the CT economy in 2002, despite the appearance of mostly negative changes for many key indicators relative to 2001.  This makes the picking of business cycle turning points a very tricky business.  In fact, only the annual totals for real GSP and population will show a gain over the past year.  This apparently perverse result has to do with the slow pace of the 2002 recovery as it will evolve throughout the year, compared to the reasonably strong performance shown by the state’s economic numbers throughout most of 2001 prior to 9/11.  However, apart from any adverse external shocks, including a stall or fall in the equity markets, the economic performance for each quarter in CT should be mildly better than the previous one.  As a point of comparison and forecast alternative, Table 1 also shows the baseline data for the Economy.com 3/02 projections, along with the NEEP 10/01forecast.  In general, NEEP 5/02 shows a slightly stronger recovery path than Economy.com 3/02, while it anticipates a much shallower fall and stronger recovery in jobs as well as better unemployment rate numbers relative to the 10/01 forecast. 

 

On the plus side, real GSP should be up by $3.2 billion in 2002, while the net gain in population should amount to some 10,000 persons.  On the downside, nonagricultural employment will average 8,000 jobs less than 2001 despite that fact that each quarter in
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 5/02                           155.8            159.0            165.3            170.2            175.3            180.5

    Economy.com 3/02                  155.8            158.1            164.3            169.2            174.2            179.3

    NEEP 10/01                          153.0            152.0            158.5            163.4            168.1            n.a.

  

Total Nonagricultural Employment (000’s)

    NEEP 5/02                           1,683            1,675            1,697            1,722            1,733            1,745

    Economy.com 3/02                  1,683            1,666            1,688            1,714            1,724            1,736

    NEEP 10/01                          1,690            1,655            1,678            1,697            1,714            n.a.

   

Total Manufacturing Employment (000’s)

    NEEP 5/02                           254.0            244.6            248.7            250.8            250.1            249.4

    Economy.com 3/02                  254.0            245.3            249.5            251.5            250.6            249.9

    NEEP 10/01                          254.2            249.9            256.4            258.4            256.8            n.a.

  

Labor Force (000’s)

    NEEP 5/02                           1,718            1,716            1,726            1,732            1,740            1,749

    Economy.com 3/02                  1,718            1,713            1,723            1,729            1,737            1,745

    NEEP 10/01                          1,728            1,734            1,741            1,746            1,754            n.a.

   

Unemployment Rate (%)

    NEEP 5/02                           3.3            4.1            3.5            3.1            3.1            3.1

    Economy.com 3/02                  3.3            4.2            3.6            3.2            3.2            3.1

    NEEP 10/01                          3.1            5.4            4.8            4.1            4.0            n.a.

   

Personal Income (Bil $96)

    NEEP 5/02                           133.7            133.3            134.7            137.4            139.8            142.3

    Economy.com 3/02                  133.7            132.5            134.0            136.6            139.0            141.4

    NEEP 10/01                          131.3            130.5            133.4            136.4            138.9            n.a.

   

Population (mil)

    NEEP 5/02                           3,426            3,436            3,442            3,445            3,450            3,455

    Economy.com 3/02                  3,426            3,436            3,441            3,445            3,449            3,454

    NEEP 10/01                          3,421            3,429            3,434            3,437            3,442            n.a.

   

Net Migration (000’s)

    NEEP 5/02                           N.C.            -3.2            -6.1            -6.8            -5.5            -6.6

    Economy.com 3/02                  N.C.             -3.3            -6.4            -7.2            -5.7            -6.9

    NEEP 10/01                          N.C.            -4.2            -7.4            -7.1            -5.7            n.a.

   

Total Housing Permits

    NEEP 5/02                           9,011            8,818            8,971            8,831            8,872            8,912

    Economy.com 3/02                  9,011            8,725            8,873            8,537            8,350            8,129

    NEEP 10/01                          8,862            8,349            8,999            8,902            9,113            n.a.

   

2002 will show a gain compared to the immediate past quarter.  All of the gain will be in the nonmanufacturing sectors including services and trade, while manufacturing jobs will continue the slide that began back in 1984, off 9,400 positions relative to the past year.  Some of these losses will be in aerospace and technology firms with software employment dropping as well.  The unemployment rate will hover in the 4% range, held down by the meager growth in the population count and the 2,000 person decline in the annual average labor force number.  Lastly, new housing permits should amount to 8,818 units, off by 200 relative to 2001.  Please note that upward revisions in the RGSP and real income data by the USDOC and the incorporation of new population census data render invalid any comparisons between 10/01 and 5/02 for these indicators. 

 

The Connecticut Outlook 2003-2006

 

The recovery should pick up some momentum as it heads into 2003, fed by continued monetary ease, the revival of capital investment expenditures and the local effects of slightly higher defense expenditures.  Job gains should amount to 21,800 new positions in 2003 with even greater employment gains of 25,500 being recorded in 2004.  Tight labor

markets will limit the job gains to 11,400 in 2005 and 12,100 in 2005.  The unemployment rate is scheduled to drop to 3.5% in 2003 and fall further to 3.1% in 2004-06.  Gains in Real GSP will amount to $6.3 billion in 2003, with additional advances of $5 billion per year from 2004 through 2006.  Manufacturing employment should stabilize at slightly less than 250,000 workers as the national economy rebounds and defense expenditures begin to rise in the state. 

 

Conference Theme: Connecticut 2000 Census Demographics

 

The data from the 2000 census confirms that CT is older, slower growing, less racially and ethnically diverse, wealthier, with fewer children and adults below the poverty line relative to the national as a whole.  The data released to date from the U.S. 2000 census count showed that CT was ranked 29th in terms of population size, with 3,405,565 persons as of 4/1/00.  This placed the state almost 500,000 persons larger than the next smaller state Iowa, and just 16,000 persons below Oregon, the next largest state.  CT was second in size within the New England region, with a bit more than one-half of the population of Massachusetts.  Despite its respectable absolute size, CT was among the slowest growing states, ranking 47th ahead of only Pennsylvania, North Dakota and West Virginia.  From the time of the 1990 census count to the 2000 estimate, the state’s population rose by only 118,449 persons, or by 3.6%.  This gain was little more than one-quarter of the rise at the national level, and was almost two full percentage points below the growth in Massachusetts, which tied with New York state for the honor of being the 41st slowest growing state.  CT was the slowest growing state in New England, which was led by 11.4% gain experienced by New Hampshire.  The median age of the CT resident was 37.4 years, or 2.1 years older than the national average.  Persons under the age of 18 accounted for 24.7% of the CT population or 1.0% less than the national average, while persons 65 years of age and older accounted for 13.6 % of the population or 1.2% more than the national average.  

  

Section 2 – Economy.com Macroeconomic Forecast – March 2002

 

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 shown in Table 2 below.  These projections help to determine the initial path for the Connecticut 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 this summer.  Current policy is highly stimulatory, with a total of 11 cuts totaling 4.75% in 2001.  However, he feels that monetary policy will not tighten until the unemployment rate peaks.  This is not expected to happen until 3:02, at which time the Fed will begin to raise the federal funds rate towards the 5% level, which is consistent with the same rate of nominal growth in GDP.  Data issued after the March simulation showed that the U.S. unemployment rate dropped from 5.8% in December 2001 to 5.5% in February 2002.  In addition, nonfarm payroll employment increased by 66,000 positions in February, after several months of large job losses.  Therefore, the increase in the fed funds rate could come as early as the May meeting of the open market committee, or in late June, if either the growth in U.S. GDP or the rise in the CPI inflation rate is above the expected level.

 

Table 2

Key Indicators U.S. Macro Forecast March 2002

 

Indicator – U.S. Macro Forecast

2001

2002

2003

2004

   Gross Domestic Product %

1.2

1.8

4.0

3.2

   Consumer Price Index %

2.8

1.4

2.3

2.3

   Total Employment %

0.4

-0.6

1.8

2.2

   Unemployment Rate %

4.8

5.9

5.6

5.4

   Housing Starts (mil.)

1.61

1.52

1.60

1.57

   Net Exports ($Bil.)

-410.2

-444.1

-454.7

-458.7

   Federal Funds Rate %

3.89

1.86

3.83

5.20

   Treas-Bond Rate 10-yr %

5.02

5.15

5.37

5.83

   S&P 500 Stock Average

1192.1

1272.3

1343.6

1390.3

   Oil West Texas ($/Bbl)

25.90

24.80

28.90

25.70

 

Second, fiscal policy is expected to be expansionary, with the federal budget passing into a deficit position approaching -$52 billion in calendar 2002 and possibly 2003.  This is after having posted surpluses in each of the past four calendar years.  The 2002 stimulus package will cost some $50 billion this year, while expenditure growth is expected to rise from 5% in fiscal 2001 to nearly a double-digit level in fiscal 2002.  Lastly, the 2001 tax cut will further erode revenues each year to 2010.  Subsequent to the release of the Economy.com simulation, the data for real GDP in 4:01 showed a gain of 1.7%, with a rise of 4% in 1:02.  The expansionary influence of fiscal policy will be reinforcing a recovery rather than countering a recession.  Therefore, the growth in real GDP should remain substantial for the remainder of 2002, leading the Federal Reserve to act earlier to raise interest rates and raise them by a larger amount.

 

Third, the trade value of the dollar is strong and may rise even more as foreign investors are attracted by the rapid recovery in the U.S., as well as the languishing expansion in the rest of the world.  Strong U.S. productivity growth along with a low rate of consumer price inflation should allow firms to rebuild their profitability, leading to good returns to investments in both stocks and bonds.  The negative side of the strong dollar will be the adverse impact on the ability of U.S. firms to sell in foreign markets and to compete domestically with cheaper imports.  Also, U.S. multinational firms will suffer some adverse effects on profits as foreign earnings are translated back into the stronger dollar for consolidated profit reporting. 

 

Lastly, the beneficial decline in energy prices is over.  Recent Middle East turmoil has pushed the price of a barrel of oil above $27.  Higher gasoline and industrial fuel prices will 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 will cut into the sales of new vehicles, especially the high profit margin SUVs. 

 

Connecticut – Cyclical Recession Data and Current Conditions.

 

The CT economy lost 28,900 jobs in the downturn from July 2000 to December 2001.  The state registered a modest gain in employment during the 1st quarter of 2002.  But at least some of the advance came from unusually strong seasonal adjustments that added more jobs in the retail sector after the end of the holiday buying season than might have

 

TABLE  3  - CT Cyclical Peaks and Lows 2000-2002

 

CT Economic Indicator

Cyclical Best

Recession Low

Difference

Mar 2002

   Nonag Employment

July 2000

1,701,000

December 2001

1,672,100

-28,900

1,672,500

   Unemployment Rate

Jun-Aug 2000

2.1%

December 2001

4.0%

+1.9%

3.5%

   Initial Wkly New 

    Claims Unemploy

Sept 2000

3,168

October 2001

6,054

+2,886

4,764

   Labor Force

July 2000

1,753,300

December 2001

1,708,800

-44,500

1,711,800

 

normally occurred.  Despite this statistical ambiguity, it appears that the brief decline is over at both the national and state levels, leaving far less damage in its wake than the last state recession from 1989-1992.  During that period, 156,000 jobs were lost, with dozens of state banks being closed and a collapse of both the commercial and residential real estate markets.  In the latest downturn, the unemployment rate nearly doubled.  But that relative comparison is a bit misleading, as it rose from an unsustainable low level of 2.1% to the more normal full employment level of 4%.  About five years ago, Economy.com conducted a study for NEEP showing that the CT unemployment rate, which was consistent with full employment, was approximately 4.4%.  Therefore, a 4% peak unemployment rate did not signal an undue hardship for state workers.  In fact, it offered a respite for employers from the incredibly tight labor markets seen in CT over the past two years. 

 

As the slowdown set in, the average number of new claims for unemployment compensation nearly doubled, mirroring the climb on the national level, and rising from a low of 3,168 in September 2000 to a peak of 6,054 in October 2001.  This coincided with the abrupt drop in economic activity registered after the WTC attack.  Lastly, the labor force peaked at 1,753,300 in July of 2000, while the low in the labor force was reached in December 2001 at 1,708,800.  Interestingly, the unemployment rate and the number of unemployed persons did not rise in lock step with the job declines.  In fact, some 44,500 persons simply removed themselves from the labor force as they lost their jobs and new employment opportunities became harder to come by.  The U.S. BLS has indicated that this anomaly may be due to the newly unemployed returning to graduate school to obtain additional education.  However, for CT it is also possible that many newly retired persons were drawn back into the exceptionally tight labor market part-time, and that upon layoff they simply returned to a retired status.  CT prohibits persons from collecting unemployment compensation if they are also receiving social security benefits. 

 

Connecticut Anticipated Labor Force Reductions – New and Continuing

 

TABLE 4 contains a list of publicly announced labor force reductions recorded from. 

 

TABLE 4

Connecticut Labor Force Reductions

Announced Between September 2001 and April 2002

 

Employer

Industry

#Jobs

Reason

Effective

  Q/Yr

Location

Kmart

Retail

78

Closed

4/02

Bristol

Bindley Western

Wholesale

200

Closed

2/02

Orange

Clairol

Chemicals

720

Relocate

1/03

Stamford

Service Merchandise

Retail

150

Closed

2/02

Statewide

Barnes Group

Engineering

80

Slow Business

1/02

Bristol

Hewitt

Personnel Mgt

17

Closed Sector

1/02

Shelton

B/E Aerospace

Aerospace

350

Closed

1/02

Litchfld

Gartner Group

Info Tech

60

Slow Business

1/02

Stamford

Peoples Bank

Fin Services

38

Cost Cut

1/02

Statewide

Evercel

Batteries

8

Closed

1/02

Danbury

Black & Decker

Elec Equipment

200

Relocated

3/02

Shelton

Cigna

Fin Services

100

Cost Cut

2/03

Hartford

Pratt & Whitney

Jet Engines

2500

Cost Cut

4/02

Statewide

Playtex

Clothing

50

Relocated

2/02

Stamford

Norden

Electronics

46

Cost Cut

1/02

Norwalk

Hamilton Sundstrand

Aerospace

119

Cost Cut

1/02

Wd Lcks

Milford Fronton

Services

220

Closed

4/02

Milford

Fleet Financial

Banking

70*

Cost Cut

4/02

Statewide

Aetna

Financial Serv

?

Cost Cut

4/02

Hartford

Skandia

Financial Serv

120

Cost Cut

4/02

Shelton

Gerber Scientific

Instruments

150

Slow Bus

4/01

So Wndsr

SS&C Tech

Software

55

Slow Bus

4/01

Windsor

Official Payments

Financial Serv

35

Slow Bus

4/01

Stamford

WWF

Services

39

Cost Cut

4/02

Stamford

Phoenix Invest Mgt

Financial Serv

16

Cost Cut

4/02

Hartford

Hamilton Sundstrand

Aerospace

350

Cost Cut

4/02

Wnd Lks

Praxair

Aerospace

100*

Slow Bus

4/02

Danbury

Stanley Works

Fabricated Met

50*

Cost Cut

1/02

Nw Brtn

Soundview Tech

Financial Serv

30*

Slow Bus

1/02