PBCTPBCT 1 Economic Environment: Has Connecticut Joined the Recovery? Southern New England Economic Summit & Outlook 2004 May 14, 2004 Todd P. Martin Economic Advisor People’s Bank

PBCTPBCT 2 The Fed is on hold … For Now "As I have noted previously, the federal funds rate must rise at some point to prevent pressures on price inflation from eventually emerging. As yet, the protracted period of monetary accommodation has not fostered an environment in which broad-based inflation pressures appear to be building. But the Federal Reserve recognizes that sustained prosperity requires the maintenance of price stability and will act, as necessary, to ensure that outcome. ” Testimony of Chairman Alan Greenspan Before the Joint Economic Committee, U.S. Senate April 21, 2004

PBCTPBCT 3 US Economic Backdrop The economic momentum that began in the second half of 2003 is carrying through into The combination of low interest rates, stimulative fiscal policy, outstanding productivity, and stronger corporate profits should result in real GDP growth of approximately 4%+ this year. The Fed has begun to set the stage for higher rates. The fed funds rate should remain at a 46-year low of 1.0% until at least the June or August 2004 FOMC meeting and move towards 1.5% by year-end. 10-year T-note yields should trend slightly higher (5%) by the end of Inflation is well contained, but concerns about the future are increasing. Risks: Jobs (insecurity & outsourcing) - Iraq - terrorism - oil prices - divisive election year - growing budget & trade deficits - stocks vulnerable?

PBCTPBCT 4 The economy is on track to grow at 4%+ in 2004 Source: Conference Board,BEA, People’s Bank

PBCTPBCT 5 Job growth is finally beginning to pick-up Source: Conference Board, BLS, People’s Bank monthly change (thousands) SA

PBCTPBCT 6 Length of job losses is longer than previous periods Source: Conference Board, BLS, People’s Bank % change in employment from peak $ Millions Current Early 90s Early 80s Mid 70s Number of Months from Peak

PBCTPBCT 7 Major discrepancies between labor surveys Source: The Conference Board, BLS, People’s Bank

PBCTPBCT 8 Jobless Claims at the lowest level since Jan Source: Bloomberg, BLS, People’s Bank US Weekly Initial Jobless Claims - 4 week MA Below 400,000 for 5-months Similar Pattern to early 1990s?

PBCTPBCT 9 The US creates - and destroys - more jobs Source: Tom Peters “Re-Imagine” Total jobs lost & created – 1980 – 1998 – US vs. Europe (millions)

PBCTPBCT 10 Outsourcing will continue Quotes: “We will never again be as dominant as we are today. But we can remain in the top spot as long as we obsess on five things: Research-Innovation, Entrepreneurship, Education, Free Trade-Open Society, Self-Reliance” [Tom Peters: Off-shoring" Manifesto/Rant: Twenty Hard Truths about Inevitabilities, Pitfalls, and Matchless Opportunities ] “The Americans’ self-image that this tech thing was their private preserve is over. This is a wake-up call to U.S. workers to redouble their efforts at education and research. If they do that it will spur a whole new cycle of innovation, and we’ll both win. If we each pull down our shutters, we will both lose." [Indian software exec to Tom Friedman/New York Times] "The notion that God intended Americans to be permanently wealthier than the rest of the world, that gets less and less likely as time goes on." [Robert Solow, Nobel Laureate in Economics ]

PBCTPBCT 11 Productivity is remarkably strong Source: Conference Board,BLS, People’s Bank

PBCTPBCT 12 Consumers are worried about jobs & Iraq Source: The Conference Board, People’s Bank 1985=100

PBCTPBCT 13 Capital Spending has rebounded nicely Source: Conference Board,BEA, People’s Bank

PBCTPBCT 14 Mgt. Refinance activity slows dramatically Source: MBA, People’s Bank

PBCTPBCT 15 Home sales are at record high levels Source: Conference Board, Bloomberg, People’s Bank US New & Existing Home Sales - millions of units (SAAR)

PBCTPBCT 16 Housing affordability is still historically high Source: Conference Board, NAR, People’s Bank

PBCTPBCT 17 ISM index at a 20-year high - Strong orders Source: Conference Board, ISM, People’s Bank Institute of Supply Management Survey (formally NAPM)

PBCTPBCT 18 Fed funds usually track nominal GDP growth Source: Conference Board, Bloomberg, People’s Bank

PBCTPBCT 19 Targeted fed funds rate less nominal GDP growth Source: Conference Board, Bloomberg, People’s Bank The Gap has never been wider

PBCTPBCT 20 Core Inflation rate beginning to move higher? Source: Conference Board, Bloomberg, People’s Bank YOY% change “core” inflation rate the lowest since early 1960s, up just 1.1% YOY

PBCTPBCT 21 CT Economic Outlook Connecticut’s Economy appears to be stabilizing, but a sustainable recovery is not yet evident in labor market. According to NEEP, state should add 8,200 jobs in 2004 and 22,000 in Unemployment rate will remain below national average. State’s economy is more diversified and performed much better than early 1990’s downturn. Manufacturing continues to be the hardest hit sector. Housing permits totaled 9,985 in the strongest since Not overbuilt like the late 1980s. CT vulnerable to national (and global) economy, stock market, energy prices, and deteriorating state fiscal condition.

PBCTPBCT 22 CT unemployment rate is well below the US rate Source: CT Labor Department % of labor force (SA)

PBCTPBCT 23 CT Job growth lags the US and is still neg. YOY Source: CT Labor Department, the Conference Board % of labor force (SA)

PBCTPBCT 24 CT has lost 62,000 jobs since July 2000 peak Source: CT Labor Department, the Conference Board % of labor force (SA) [Thousands]

PBCTPBCT 25 CT construction employment levels-off Source: CT Labor Department, the Conference Board [Thousands]

PBCTPBCT 26 CT Manufacturing has been the hardest hit sector Source: CT Labor Department, the Conference Board [Thousands]

PBCTPBCT 27 CT Manufacturing still shedding 8,000 jobs a year Source: CT Labor Department, the Conference Board [Change - Thousands]

PBCTPBCT 28 CT Service sector is where job growth has been Source: CT Labor Department, the Conference Board [Thousands]

PBCTPBCT 29 CT Claims are moving in the right direction Source: CT Labor Department

PBCTPBCT 30 Unemployment rates up sharply from 2000 CT Unemployment Rates % by Labor Market Area (NSA) Source: CT Labor Dept.

PBCTPBCT 31 CT Job losses across the board YOY Change in CT Non-Farm Employment March 2004 vs. March 2003 ( Not SA ) Source: CT Labor Department

PBCTPBCT 32 Fewer industries adding jobs in CT YOY Change in CT Non-Farm Employment March 2004 vs. March 2003 ( Not SA) Source: CT Labor Department

PBCTPBCT 33 Housing permits very strong so far in 2004 Source: CT DECD % Change in CT New Housing Permits Authorized YTD January - March 2004 vs by LMA Permits totaled 9,985 last year, the strongest since 1999 and the 3rd strongest since Total 2,176 YTD in 2004 vs. 1,683 in 2003.

PBCTPBCT 34 Housing is not overbuild like the mid-1980s Source:CT DECD, New England Economic Project Total housing permits authorized in CT in units is forecast

PBCTPBCT 35 Auto registrations down 4.4% YTD Source: CT Labor Department Connecticut New Auto Registrations Processed YTD - (January - March)

PBCTPBCT 36 Tax revenues up 6.9% this year Source: State of CT Dept. of Revenue Services Year-to-Date % change in CT Tax Revenues ( FY vs. FY July - March ) Up $419 million

PBCTPBCT 37 Summary Economic growth continues to improve in 2004 due to: low rates - fiscal stimulus - productivity - corporate profits - capital spending - weaker dollar Fed’s “Patience” is coming to and end – tightening of monetary policy should begin by August Connecticut economic growth has lagged the US - meaningful job growth not likely until Higher taxes, higher costs, impeachment hearings are not helping recovery Watch: Jobless Claims - employment - purchasing managers’ index - oil prices - home prices - consumer confidence Risks: Companies don’t hire - Iraq & Middle East - nasty election year - more terrorist attacks - higher oil prices - stock correction - deficits

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