The Connecticut Economic Outlook

1^st Quarter 2002 to 4^th Quarter 2006

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

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

• To the extent that CT experienced a recession in 2001, the NEEP forecast anticipates that the decline ended as of the 1^st quarter of 2002.

• Total nonagricultural employment fell from a revised peak of 1,701,000 jobs in July of 2000 to a low of 1,672,100 positions in December 2001.

• The loss of 28,900 jobs caused the unemployment rate to rise from 2.1% to 4.0%.

• Strong seasonal adjustments to trade employment led to reported job gains in January 2002. But NEEP expects revised employment to be flat in the 1^st quarter relative to the 4^th quarter of 2001 at 1,672,700, with only modest quarterly gains to 1,678,00 by the 4^th quarter of 2002.

• For 2002, employment should average 1,674,800, with the slow pace of job growth leaving the total some 8,000 positions below 2001.

• CT may add 11.2k jobs in 2003, 25.5k in 2004, 11.2k in 2005 and 12,1k in 2006.

• The unemployment rate should average 4.1% in 2002, up from 3.3% in 2001, with the rate falling to 3.5% in 2003 and 3.1% in 2004.

• The CT labor force registered a steep decline from the July 2000 peak of 1,753,300, to a low of 1,708,800 in December 2001. Only a minimal gain is expected in 2002, but 10,200 more persons are seen in the workforce by 2003.

• As mortgage interest rates rise, new residential home permits should fall slightly to 8,818 in 2002, from 9,011 in 2001. However, the general recovery will keep total residential sales near 51,000, down just slightly from the high of 53.6k in 2001. The average home sale price will climb to $206,800, up 7.4% from the $192,600 figure for 2001.

• The recovery will boost Real GSP in 2002 by $3.26 billion to $159,043. For the years thereafter, the annual gains in R32GSP should average around $5 billion.

• Despite the gains in RGSP, real personal income may fall slightly by $400 million in 2002 owing resulting from the decline in equity values. But real income growth will resume in 2003 up by $1.5 billion, with gains averaging $2.5 billion per year thereafter, supporting a $2 billion annual growth in retail sales.

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

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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 29^th 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 47^th 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 41^st 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 1^st 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	Old Gwh
GE Capital	Financial Serv	250*	Cost Cut	4/02	Fld Cty
MedSpan	Medical Serv	75	Merger	3/02	Hartford
Total 31		6,276

* Estimated value from public sources

September 2001 through April 2002. The largest expected job cut will be at the Pratt & Whitney aircraft engine division of UTC Corp. Another cut of 350 positions is expected at the UTC aerospace division, Hamilton Sundstrand. Both of this cuts were announced in 2001 and confirmed by company officials in early 2002. However, the firm has also indicated that it does not expect to announce any further job reductions in the foreseeable future. There were three other large-scale manufacturing job cuts affecting firms scatter throughout the state. First, the Clairol hair products firm is relocating 720 jobs from its manufacturing and administrative workforce out of Stamford. Next, B/E Aerospace, formerly the largest employer in Litchfield, closed its operations in CT as of the 1^st quarter of 2002, idling some 350 workers. Lastly, Black and Decker, the maker of household electronic products, will move 200 jobs out of its facilities in Shelton. Nine of the job cuts were among financial services firms including an estimated 250+ at GE Capital located in Norwalk and Stamford. The division is cutting 7,000 positions worldwide after cutting an additional 19,000 in 2000 and 2001. It currently has 4,300 jobs located in Fairfield County. Lastly, three of the job cuts were at retail firms with the closing of some Kmart and Service Merchandise stores as well as the relocation of Bindley Western, a large wholesale distributor located in the Town of Orange. In total, there were 30 announcements amounting to 6,201 job losses.

Connecticut Anticipated Labor Force Increases

TABLE 5 contains data for the labor force additions publicly announced from September 2001 to April 2002. This list also contains job additions that may have been announced earlier, but which were reaffirmed during this time period. The largest increase was for Pratt & Whitney, which is expected to hire some 700 design and production workers for the F-119 fighter contract. The paradox here is that while the firm is hiring for one program, it is still laying off workers associated with other programs were business has slowed. Other big job additions were announced for Electric Boat and the Mohegan Sun

Table 5

Publicly Announced Job Additions – September 2001-April 2002

Employer	Industry	# Jobs	Date Q/Yr	Location
Sikorsky Aircraft	Helicopters	150	To 2006	Bridgeport
Fleet Financial	Financial Serv	100	2/02	Statewide
Mohegan Sun	Casino	500	2/02	Uncasville
Home Depot	Retail	175	1/02	Stratford
WalMart	Retail	250	1/02	Stratford
Pratt & Whitney	Aerospace	700	4/02	EastHartford
Porricelli’s	Retail	75	2/02	Trumbull
Electric Boat	Submarines	500	4/02	Groton
People’s Bank	Financial Serv	43	2/02	Statewide
MTU Aero Engines	Jet Engines	30	4/02	Rocky Hill
Burlington Coat Factory	Retail	110	1/02	Meriden
Total 11		2,632

casino complex. EB is adding workers to cover design and early production stages for the newest class of attach submarines. This work is being shared with Newport News Shipbuilding in Virginia. The Mohegan Sun addition covers the hospitality and support staff at the new 34-story hotel, conference and gaming center that it opened in April. The 150 jobs to be added by Sikorsky Aircraft are the net positions that are expected to result from the early stages of production for the Comanche Helicopter program. These jobs are new and will be located at the firms Bridgeport production facility. The program will also help to stabilize the 7,000 Sikorsky jobs remaining at the nearby Stratford plant. A major retail complex opened in Stratford on the site of the former Raybestos Brakeling plant. The site has been environmentally remediated with the help of federal superfund dollars. The complex could hire as many as 600+ full-time and part-time retail workers when fully operational. Current occupants include big box stores from Wal-Mart and Home Depot.

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 all of the NEEP Connecticut forecast.

Section 4 – The Connecticut Economy in Detail

The statistically identifiable employment spillovers in CT resulting from the events of 9/11 in nearby NYC have been minimal at best. Early on, a few firms relocated a portion of their workforce from lower Manhattan to the greater Stamford office market. However, the estimate of the total space absorbed is only 500,000 sq.ft. Also, the permanent loss of jobs held by CT residents appears to have been limited. This is not to say that the economy of NYC hasn’t been severely affected by the dual blows of the recession and the destruction of the World Trade Center. Total city employment is down by –135,000 from February 2001 to February 2002. The loss amounts to a 4.2% level of job decline for the city vs. a 1.5% drop at the national level. Major losses have been recorded in business service jobs (-38.9k) and securities firms (-16.9k). Residents from the surrounding boroughs or New Jersey may have filled many of the lost positions. These numbers are limited relative to the 442,000 positions that disappeared between the end of 1988 and 1993. This loss amounted to 12% of the NYC labor force.

For March 2002, another 2k positions were lost, but this number was less than the drop of –14k in February. Therefore, there is some hope that the rate of job loss is beginning to slow. Nevertheless, the NYC unemployment rate rose from 7.2% to 7.5% in March. Outside NYC in Putnam County and on Long Island, the job count has actually grown over the past 12 months, with minimal job losses being recorded in Rockland and Westchester Counties. Perhaps, to the extent that employment relocations are taking place, they are happening closer to the City proper or in New Jersey where many of the workers from lower Manhattan reside. In all, the recession and events of 9/11 have slowed the growth in high paying job opportunities for Fairfield County residents and as such may have more of an income rather than employment affect on CT.

Despite the limited gains in private employment the aftermath of 9/11 has contributed to a considerable amount of additional spending for CT defense firms. The recent defense appropriations bill allocated $459 million for 35 army and navy versions of the Black Hawk helicopter from the Sikorsky Aircraft division of UTC. Sikorsky, in cooperation with Boeing, also received some $816 million in prototype development funding for the new Comanche helicopter. The firm has designed its Bridgeport facilities as the site for design and construction. Therefore, Sikorsky will relocate 350 jobs to the site and hire an additional 150 technical and manufacturing workers to 2006. The army plans to purchase 1,200 Comanche helicopters over the life of the program. The legislation also allocated some $2 billion to Electric Boat for the construction of a new attack submarine and an additional $279 million for the conversion of some Trident missile firing subs to attack configuration. 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 firm will also receive $288 million for engines associated with other military contracts. The firm 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. Lastly, there was $49 million awarded 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 10^th 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. Together they paid $33 million to the state as part of their $132 million in slot earnings. The total slot handle amounted to $1.595 billion in March 2002, with a payout averaging 91.8% at Foxwoods and 91.6% at Mohegan Sun. These are among the highest payouts of any casino in the world. On a 12-month basis, total slot earnings net of payout would amount to approximately $1.584 billion. This figure is before the payment of casino operating expenses and the one-quarter transfer to the state. Slot machine earnings typically account for 50-60% of casino net revenues. Therefore the two casinos are potentially making between $2.64 and $3.17 billion before expenses. Assuming that expenses average one-half of the net, then the residual profit for the two casinos is approximately $1.32 billion to $1.58 billion. These dollars would be divided up approximately 60 percent for Foxwoods and 40 percent for Mohegan Sun in 2002.

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 several more Indian casinos in the near term future for CT. There will be a final decision on Federal recognition for the Eastern Pequot and Pawcatuck Eastern Pequot tribes in June 2002. They have already received a position preliminary finding from the Bureau of Indian Affairs in March 2000. A decision on the Golden Hill Paugussett tribe in Bridgeport is scheduled for December 2002, while the Schaghticoke Tribal Nation’s petition for recognition is expected in October 2003. All four 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 groups.

Both the Governor and State Legislature would like to receive more of this gaming revenue as they wrestle with the dual problems of closing a fiscal 2002 budget gap of $514.6mil and a fiscal 2003 gap that may be in excess of $800 million. Over the past three years, the State has run a budget surplus averaging $500 million per year, using most of the funds to increase expenditures while putting $685m into a “Rainy Day Fund.” However, the national recession, combined with the events of 9/11 and the declines in the stock market have created a projected General Fund deficit as tax receipts have fallen dramatically. CT is just one of approximately 40 states that are currently facing some magnitude of budget gap. The state has already raised the tax on cigarettes by $.61 per pack effective April 1^st to plug part of the hole, and will use a substantial portion of the reserve fund to cover the remainder of the fiscal 2002 gap. The latest proposal is to raise the income tax rate from 4.5% to 5.5% on all residents with $1 million or more in earnings. This tax would affect some 6,300 rate payers and lead to a revenue gain of $140 million, which is equal to the fiscal 2003 gain anticipated from the cigarette tax hike. The so called “millionaire’s tax” is opposed by Governor Rowland and has already been rejected once by the legislature. However, it is a ready alternative to draconian cuts in state spending and appears to be the lest unpopular option in a Gubernatorial election year.

Electric power issues, especially in Fairfield County, are attracting considerable policy attention in CT. Part of the controversy involves the issue of allowing the construction of an under sea transmission cable across Long Island Sound from New Haven harbor to Shoreham NY, to carry electric power from Canada to Long Island. The project would 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 Connecticut Sitting Council has approved the project after extracting major environmentally friendly changes. However the legislature has proposed a one-year moratorium on any such construction. Governor Rowland vetoed the bill, with the veto being upheld in the State Senate in late April. In place of the legislative moratorium, the Governor issued an executive order forestalling all other cable construction but allowing the controversial cable to go forward this summer. 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, this is 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.

Sales of existing homes and home prices continue to be strong in CT although the pace of new home permits has slackened somewhat in early 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. However, for the first two months of 2002, new home permits statewide were off by some 320 units or 20 percent relative to 2001. While mortgage rates remain attractively low, the rise in home construction costs and land prices have driven up the price of new homes. Along with the slowing growth in income, these forces make the outlook for new home building less robust than in the past year.

Section 5 Conference Theme - CENSUS DEMOGRAPHICS: 1990-2000

State and National Data

Partial data from the U.S. 2000 census count showed that CT was ranked 29^th 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 47^th 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 41^st slowest growing state. CT was the slowest growing state in New England, which was led by 11.4% gain experienced by New Hampshire.

Figure - Comparative Demographic Aggregates

Demographic Characteristics	United States	Connecticut	Massachusetts
Population 4/1/2000	281,421,906	3,405,565	6,349,097
Population 4/1/1990	248,709,873	3,287,116	6,016,425
Pop. Estimate 7/1/01	284,796,887	3,425,074	6,379,304
Population, % change 1990-2000	13.1	3.6	5.5
% Male - % Female 2000	49.1 – 50.9	48.4 – 51.6	48.2 – 51.8
% White - % Black 2000	75.1 – 12.3	81.6 – 9.1	84.5 – 5.4
% Hispanic - % Asian 2000	12.5 – 3.6	9.4 – 2.4	6.8 – 3.8
Persons under 18 years %	25.7	24.7	23.6
Persons 65 years and over %	12.4	13.6	13.5
Median age years	35.3	37.4	36.5
Home Ownership Rate	66.2	66.8	61.7
Median HH money income 1997	$37,005	$46,648	$43,015
Persons below poverty line 1997	13.3	8.9	10.7
Children below poverty line 1997	19.9	14.7	17.0

This slow growth helps to explain why CT lost one of its six Congressional seats in the reapportionment of the House of Representatives based upon the census outcome. Some of CT’s slow population growth can be traced to the deep and prolonged recession of the early 1990’s. At that time, substantial job losses led to workers leaving for other areas and intensified the usual pattern of net domestic outmigration from the state. Also, having an older population, fewer fast growing minority group members and being a high cost of living state, which tends to cut down the extent of foreign immigration, all contribute to the slow population growth as well.

The data in Figure , show that Connecticut’s gender, racial and ethnic mixes tend to leave the state with a population that is more female, with a higher concentration of White persons and fewer persons who identify themselves as being Hispanic or Asian compared to the nation on average. Also the CT population is older with a median age of 37.4 years, compared to either the U.S at 35.3 years or our neighbor Massachusetts where the population median was 36.5 years of age. Not surprisingly, a smaller fraction of CT residents were under the age of 18 (24.7%), and more were 65 years of age or over (13.6%) in CT relative to the U.S. On the plus side, an older population, with more persons concentrated in the prime working years, helps to explain some of the nearly $10,000 greater per capita income (1997 estimate) for state residents relative to the U.S. In turn, the greater income supports a slightly higher rate of home ownership in CT than in the U.S. The rate is also much larger than that for Massachusetts, where higher housing prices relative to average income along with a more fluid, apartment bound population in Greater Boston help to explain the lower rate of Mass home ownership. While, the census numbers on poverty aren’t available as yet, the 1997 estimates show CT with a lower share of the population below the poverty line and fewer children in that category than either the U.S. or Massachusetts.

CT County Data

The same data divisions are presented for the eight counties within CT as part of Figures and . Between 1990 and 2000, Fairfield County, located in the Southwest corner of the state with 882,567 persons, surpassed Hartford County as having the largest overall population. The smallest county was Windham, with 109,091 persons in the northeast quadrant. Middlesex, in the center of the state, was the fastest growing county, with an 8.3% gain. Fairfield, Tolland and Windham counties all had growth rates in the 6% range, while Hartford barely showed any advance at all, with a rise of just 0.6%. New London County, which suffered job losses related to declines in the military and defense employment, also demonstrated minimal gains at 1.6%. Litchfield County, a reasonably

Figure - Comparative Demographics: CT County Level

Demographic Characteristics	Fairfield	Hartford	Litchfield	Middlesex
Population 2000	882,567	857,183	182,193	155,071
Population 1990	827,645	851,783	174,092	143,196
Population, % change 1990-00	6.6	0.6	4.7	8.3
% Male - % Female 2000	48.3 – 51.7	48.1 – 51.9	48.9 – 51.1	48.7 – 51.3
% White - % Black 2000	79.3 – 10.0	76.9 – 11.7	95.8 – 1.1	91.3 – 4.4
% Hispanic - % Asian 2000	11.9 – 3.3	11.5 – 2.4	2.1 – 1.2	3.0 – 1.6
Persons under 18 years %	25.6	24.6	24.6	23.2
Persons 65 years and over %	13.3	14.7	14.2	13.6
Median age years	37.3	37.7	39.6	38.6
Home Ownership Rate %	69.2	64.2	75.2	72.1
Median HH money income 1997	$56,872	$46,011	50,589	$46,648
% Below poverty line 1997 %	7.9	10.4	5.3	5.2
% Children below poverty 1997	12.9	17.5	8.3	8.6

Rural, agricultural and retirement area had the oldest mean population number at 39.6 years, while Tolland, which is home to the University of Connecticut, was the youngest with a mean age of at 35.7 years. The home ownership pattern was the highest in Fairfield County at 69.2%, while New Haven County had the lowest fraction of home owners at 63.1%. The largest population share at 65 years and older was in Hartford, while Tolland had the smallest share in this age group. Fairfield, at 25.6%, had the largest share of its population under the age of 18 years, while Tolland had the smallest at 23.1%. Tolland, Windham, Litchfield and Middlesex counties all had more than 90% of their population as members of the White Race, while African-Americans were most prominent in Hartford County at 11.7%. Median household income was the highest in

Figure - Comparative Demographics: CT County Level

Demographic Characteristics	New Haven	New London	Tolland	Windham
Population 2000	824,008	259,088	136,364	109,091
Population 1990	804,219	254,957	128,699	102,525
Population, % change 1990-00	2.5	1.6	6.0	6.4
% Male - % Female 2000	48.0 – 52.0	49.5 – 50.5	50.1 – 49.9	49.3 – 50.7
% White - % Black 2000	79.4 – 11.3	87.0 – 5.3	92.3 – 2.7	91.3 – 1.9
% Hispanic - % Asian 2000	10.1 – 2.3	5.1 – 2.0	2.8 – 2.3	7.1 – 0.8
Persons under 18 years %	24.5	24.4	23.1	25.1
Persons 65 years and over %	14.5	13.0	10.2	12.3
Median age years	37.0	37.0	35.7	36.3
Home Ownership Rate %	63.1	66.7	73.5	67.4
Median HH money income 1997	$44,412	$44,566	$55,223	$41,108
% Below poverty line 1997 %	10.6	8.1	5.4	9.8
% Children below poverty 1997	18.0	12.4	7.5	16.1

Fairfield County at $56,872, followed very closely a figure of $55,223 for households in Tolland County. Households in New Haven County had the lowest money income at $44,412. Litchfield, Tolland and Middlesex Counties all had general poverty rates of barely above 5%, while New Haven, Windham and Hartford had rates approaching or above 10%. The fraction of children below the poverty line was the lowest in Tolland at 7.5%, while the number approached 18% in both Hartford and New Haven.

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 than for the national as a whole.

Section 5 – Risks to the Forecast

National Based Forecast Risks

As of this writing, the stock market continues to drift aimlessly in response to lackluster first quarter 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 in the summer. However, when it does, it runs the risk of choking off what appears to be a weakening recovery. A premature rise in interest rates may well retard the ability of the CT economy to record the slow but steady progress in 2002 that is part of this forecast.

Third, energy prices for gasoline and home heating oil have risen sharply over the past 90 days. CT consumers and producers are heavily dependent upon petroleum products for their energy supplies. The rise acts as a tax, taking funds from other consumer expenditures and placing CT manufacturing firms at a competitive disadvantage. Major OPEC nations have said that they will not use oil as a weapon in the Middle East conflict. However, new charges have arisen that point the finger of blame for the price increases towards the major oil refiners who may have been manipulating prices. Regardless of the outcome of these two issues, the temporary uncertainty creates an unstable environment in which fragile national and state recoveries must take hold.

Lastly, the collapse of Enron has undermined investor confidence in final reporting in general and within specific companies. Firms that would otherwise be able to weather the downturn and participate in the recovery have been cut off from normal sources of funds, with their stock values driven below their asset values by the uncertainty. Many of the firms are in IT and/or telecom. Their rebound in capital spending is essential for a prolonged expansion. While a strong economic recovery would improve profit visibility and erase many of the fears, the lack of evidence of a broad based current recovery is prolonging the malaise. This accounting issue, which is hanging over the equity and real markets, will make it doubly difficult for the Federal Reserve to take the correct policy action, at the right time and by the right amount.

State Based Forecast Risks

Undoubtedly the biggest issue at the state level is the current budget process and how it will deal with the revenue shortfalls in both fiscal 2002 and fiscal 2003. The legislature send a budget to Governor Rowland, who vetoed it, claiming the package was unfair to high-income individuals and did not contain a sufficient amount of expenditure cuts. In turn the legislature has steadfastly maintained that it will not balance the budget on the backs of school children, the poor, the elderly and those in need of state support for social services. Eventually, a compromise will be struck. But the size of the gap $7-800 million for fiscal 2003 will not be closed easily. Undoubtedly, the compromise will contain major tax increases and spending cuts. 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