QUARTERLY ECONOMIC UPDATE: NEW PERSPECTIVES ON THE U.S, HARTFORD, AND SPRINGFIELD AREA ECONOMIC RECOVERIES

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1 QUARTERLY ECONOMIC UPDATE: NEW PERSPECTIVES ON THE U.S, HARTFORD, AND SPRINGFIELD AREA ECONOMIC RECOVERIES Presented by: Don Klepper-Smith Chief Economist & Director of Research DataCore Partners LLC & Economic Advisor to Farmington Bank (860) June 2018 Webinar Based on April 2018 data

2 TOPICS ) 1. THE CURRENT U.S. ECONOMY ) ) 2. THE CONNECTICUT ECONOMY: EMPLOYMENT METRICS AND THE FARMINGTON BANK BUSINESS BAROMETER 3. PERFORMANCE WITHIN THE HARTFORD AND SPRINGFIELD AREA ECONOMIES ) 4. SUMMARY AND CONCLUSIONS

3 THE PRO S AND CON S OF LIVING IN AN INTERCONNECTED GLOBAL ECONOMY:

4 CONSUMER FUNDAMENTALS BEING PRESSURED: The price of oil has recently topped $70/barrel for WTIC, up roughly $20/barrel, far outpacing the overall rate of inflation During the Memorial Day weekend, the cost of gasoline in CT was averaging about $2.97/gallon, up 31% from a year ago. KEY Q: What do gas prices look like for traveling this summer, and what do oil prices look like for the upcoming heating season this winter? KEY DEVELOPMENT: Consumers fundamentals are being pressured and risks to the current business expansion are becoming more apparent with rising energy prices, higher interest rates, and the expectation of higher health care costs heading into 2019

5 1. ASSESSMENT OF THE U.S. ECONOMY: " Looking at the components of real GDP- consumption, investment, govt spending and net exports- we see that the 2018 outlook will affected by: 1) enacted tax cuts, 2) potential trade wars that could emerge as a result of new tariffs on steel and aluminum, and 3) a new Fed Chair, Jerome Powell, who may be a bit maore hawkish with respect to inflation. Present economic fundamentals now argue for another year of modest growth in the range of 2%-2.5%, but the odds of a policy error are arguably on the rise 1Q2018 REAL GDP UP AT SAAR OF JUST 2.2% ACTUAL GROWTH RATE: 0.5% Importantly, increased productivty will continue to be a driving force behind real GDP growth with both capital and labor working harder. Economic research shows a strong correlation between business productivity growth and overall economic expansion in the long run.

6 10.0% 5.0% 0.0% -5.0% -10.0% GROSS DOMESTIC PRODUCT VS. BUSINESS PRODUCTIVITY (SAAR % CHANGE, 2007Q1-2017Q4) 4.9% 3.1% 2.5% 2.7% 2.0% 1.7% 1.4% 1.0% 0.2% 0.4% -2.7% -3.8% 4.0% -1.9% -2.5% -8.2% 3.1% -5.4% 7.9% -0.5% 5.9% 1.3% 4.9% 3.9% 3.9% GENERALLY SPEAKING, BUSINESS PRODUCTIVITY IS HIGHLY CORRELATED WITH REAL GDP GROWTH. THEREFORE, AS GOES PRODUCTIVITY, SO GOES THE GENERAL ECONOMY 2.7% 2.9% 3.1% 2.8% 2.5% 2.7% 2.8% 2.1% 2.3% 2.0% 1.7% 1.9% 1.4% 1.6% 1.6% 1.3% 0.8% 0.9% 0.6% 0.8% 0.5% 0.1% -1.5% -3.3% 4.6% -0.7% -0.7% -1.8% -0.7% 4.4% 4.0% -0.9% 5.2% 4.6% 4.4% -3.4% 3.2% 3.1%3.2% 2.7% 2.8% 3.0% 2.7% 2.9% 2.4% 2.5% 2.0% 2.2% 1.6% 1.8% 1.3%1.3% 1.3% 1.5% 1.2% 0.8% 0.5%0.6% 0.1% -0.0% Q: WHAT DRIVES BUSINESS PRODUCTIVITY? IN MANY RESPECTS, THE ANSWER INVOLVES THE STEM SKILLS, NAMELY SCIENCE, TECHNOLOGY, ENGINEERING & MATH % -2.6% -1.2% REAL GDP BUS. PRODUCTIVITY SOURCE: U.S. Bureau of Economic Analysis

7 500 U.S. JOBS LOST/GAINED (000) MONTHLY U.S. JOB GROWTH & UNEMPLOYMENT SINCE 3/91 U.S UNEMPLOYMENT (%) TOTAL NON-FARM JOBS ROSE BY 223,000 IN MAY OFFICIAL U-3 UNEMPLOYMENT RATE: 3.8%, U-6: 7.6% MONTHS 3.5 SOURCE: U.S. DEPT. OF LABOR NON-FARM EMP UNEMPLOYMENT %

8 CONSUMER CONFIDENCE (U.S. VS. NEW ENGLAND, JAN 88- MAY 2018) CONSUMER CONFIDENCE INDICES (85=100) U.S. CONSUMER CONFIDENCE AS OF MAY 2018: UP 8% " " " " " "" " " """ " "" " " " " " "" " " " "" " " " "" " " " "" "" " "" " "" " " " "" " " " " " " " "" " " " " " " ON A YTD BASIS. " " "" " " " " " " " " " "" " " " " "" " " " " " " " " """" " " " " """ "" " " " " " "" """ "" """ " "" " " " "" "" " "" " " """ " " "" " " " " "" " " " " " '00'01'02'03'04'05'06'07'08' NEW ENGLAND CONFID. " U.S. CONFIDENCE SOURCE: CONFERENCE BOARD

9 WEALTH EFFECTS WILL BE KEY IN 2018

10 10 INTEREST RATES TO REMAIN LOW: FIXED 30-YR MORTGAGE RATES VS FEDERAL FUNDS RATE & THE PRIME RATE (JAN APR 2018) yr mortgage rate 4.47% Fed Funds: 1.75% Prime Rate: 4.75% " "" " "" " " " "" " """ "" " " """ " " """ " """ """" " """" " " """" " Look for interest rates to climb gently through 2018 as the Fed is "" apt to " " " """ " """ " continue with an accommodative " " " " "" " " monetary policy given overall economic risks. JANJANJANJANJANJANJANJANJANJANJANJANJANJANJANJANJANJANJANJANJANJANJANJANJAN PRIME RATE " FED FUNDS FIXED 30 YR Sources: Federal Reserve, Fannie Mae. Note Freddie Mac data on 30yr rates as of 10/2014. Average monthly commitment rate

11 10-YEAR U.S. GOVT BOND YIELD

12 YIELD CURVE- U.S. TREASURIES YIELD CURVE FLATTENING Source: Courtesy of Factset, 4/19/2018

13 2-YR VS. 10-YR TREASURIES

14 2. THE CONNECTICUT ECONOMY:

15 DATACORE ASSESSMENT OF THE CT ECONOMY: The CT economy is showing clear signs of decelerating in many of its economic metrics. The State has lost almost 5,000 jobs over the last two months, up only 0.4% YTD, and our job recovery rate has slipped below 80%. Moreover, new real GSP data shows CT ranked 49th in the U.S in 2017 overall economic growth, down 0.2%. Today we see that the CT economy is now underperforming on many fronts, namely job growth and income creation. We are the only New England state not to see full job recovery as of April 2018, and at the current pace of job growth, we re not likely to see full job recovery until sometime in mid Jobs are essential to overall economic health because of the linkages to income, consumer spending, tax revenue and consumer and business confidence. Job growth, and job quality, matter tremendously in generating sufficient levels of future economic growth here in CT. - Don Klepper-Smith Chief Economist and Director of Research DataCore Partners & Economic Advisor to Farmington Bank

16 FARMINGTON BANK BUSINESS BAROMETER (FBBB) COINCIDENT INDICATOR OF ECONOMIC ACTIVITY WITHIN CONNECTICUT FORMED FROM THREE STATEWIDE SERIES: - MANUFACTURING PRODUCTION - NON-MANUFACTURING EMPLOYMENT - REAL DISPOSABLE INCOME RELIABLE BAROMETER WITH RESPECT TO THE MAGNITUDE AND DIRECTION OF OVERALL ECONOMIC EXPANSION This report is published by DataCore Partners, LLC. The content, opinions and views in this publication are those of Don Klepper-Smith, Farmington Bank s Economic Advisor, and are not intended to provide specific advice or recommendations for any individual. Consult professional advisors with regard to your individual situation DataCore Partners, LLC

17 8 6 4 FARMINGTON BANK BUSINESS BAROMETER (YEAR OVER YEAR % CHANGE) % CHANGE- YR/YR (1970Q1-2018Q2) The FBBB shows the CT economy slowing, down 0.2%on a YR/YR basis based on partial 2Q2018 data through April. The FBBB dropped 0.2%for all of YR/YR CHANGE-FBBB YEARS Note: Reflects March 2018 Labor Dept. Revisions This report is published by DataCore Partners, LLC. The content, opinions and views in this publication are those of Don Klepper-Smith, Farmington Bank s Economic Advisor, and are not intended to provide specific advice or recommendations for any individual. Consult professional advisors with regard to your individual situation DataCore Partners, LLC

18 U.S. VS CONNECTICUT BUSINESS CYCLES REAL GDP VS. FARMINGTON BANK BUSINESS BAROMETER ANNUAL % CHANGE, % CHANGE The CT economy saw a fractional loss in 2017 of -0.2%after a mild 1.2% climb in 2016, still well below our long-term average annual growth rate of 2.5% projection:+0.3% FBBB REAL GDP FBBB REAL GDP Source:DataCore Partners LLC, U.S. Commerce Dept., Note: Reflects March 2018 Data Revisions; Forecast Begins 2018 This report is published by DataCore Partners, LLC. The content, opinions and views in this publication are those of Don Klepper-Smith, Farmington Bank s Economic Advisor, and are not intended to provide specific advice or recommendations for any individual. Consult professional advisors with regard to your individual situation DataCore Partners, LLC

19 REAL CONNECTICUT DISPOSABLE PERSONAL INCOME ANNUAL % CHANGE, % CHANGE CT S BROADEST MEASURE OF CONSUMER SPENDING POWER HAS RISEN AN AVG. OF ABOUT 4%-6%/YR DURING PRIOR CONOMIC RECOVERIES CHANGE: -0.5%, 2018 FORECAST: -0.4% CT REAL GSP DATA DOWN 1.2% YTD THROUGH 3Q2017 Series 3 Series %CH RDI %CH RDI Source: U.S. Commerce Dept., CT. Labor Dept., BEA, DataCore Partners LLC, Revised March 2018 Note: 2014 data skewed to the upside because of weakness in 1q2013 due to expiration of the Bush tax cuts and automatic federal spending cuts (fiscal cliff).

20 CUMULATIVE CT. JOB LOSSES FROM March 2008 PEAK LEVELS TO PRESENT (000) CT LOST 119,100 JOBS PEAK TO TROUGH. CURRENT LOSS FROM PEAK: -26,200 (APR 2018) SOURCE: CT. DEPT. OF LABOR DEPT. MONTHS

21 20 0 CUMULATIVE CT. JOB LOSSES FROM March 2008 PEAK LEVELS TO PRESENT (000) CT LOST 119,100 JOBS PEAK TO TROUGH. CURRENT LOSS FROM PEAK: -26,200 (APR 2018) ASSUMING THE CURRENT AVG. GROWTH RATE OF ABOUT 1,000 NEW JOBS EACH MONTH, THE CT. JOB MARKET WILL NOT FULLY RECOVER UNTIL SOMETIME IN MID-2020 ASSUMING CURRENT DATA AND THE CURRENT PACE OF GROWTH MONTHS SOURCE: DATACORE PARTNERS LL, CT. DEPT. OF LABOR DEPT., REFLECTS 3/18 DOL REVISIONS

22 JOB EROSION VS. JOB RECOVERY: ALL SIX NEW ENGLAND STATES APRIL 2018 DATA CT IS NOW LAST IN NE JOB RECOVERY CT ME MA NH RI VT JOB PEAK (000) 1, JOB TROUGH (000) 1, ABSOLUTE LOSS (000) % LOSS: EROSION RATE 7.0% 4.9% 4.2% 4.7% 8.0% 4.7% CURRENT JOBS (000) 1, JOB GAIN FROM LOW (000) % GAIN: JOB RECOVERY RATE % 122.1% 322.5% 201.0% 109.0% 136.1% SOURCE: BLS, DATACORE PARTNERS LLC, REFLECTS 3/18 CT DOL DATA REVISIONS * RECOVERY RATE IS DEFINED AS PERCENTAGE OF JOBS RECOVERED VS. THOSE LOST ON A PEAK TO TROUGH BASIS

23 4 YEAR-OVER-YEAR % CHANGE IN TOTAL NON-FARM EMPLOYMENT CONNECTICUT. VS U.S/ JAN APR 2018 U.S. AND CT % CH -EMPLOYMENT-YR/YR CT Total Non-Farm Employment fell by 1,400 jobs in April after a revised loss of 3,500 jobs in March. On a year over year basis, total non-farm employment rose by 8,700 jobs, up 0.5% U.S. CT Upside momentum is now slowing in /11 1/12 1/13 1/14 1/15 1/16 1/17 1/ SOURCES: U.S. DEPT. OF LABOR MONTHS

24 REVISED MONTHLY CT. JOB GAINS/LOSSES AND UNEMPLOYMENT SINCE DEC 2007 CT. JOBS LOST/GAINED (000) CT. UNEMPLOYMENT (%) The State has created 92,900 jobs since the low in Feb CT Job Recovery Rate Now at 78.0%. April 2018 Unemployment Rate: 4.5% SOURCE: CT. DEPT. OF LABOR DEPT. NON-FARM EMP UNEMPLOYMENT % MONTHS 3.5

25 1,800 1,700 CONNECTICUT AVERAGE ANNUAL TOTAL NON-FARM EMPLOYMENT LEVELS, (THOUSANDS, ) THE NEW DATACORE FORECAST CALLS FOR A FRACTIONAL GAIN OF ABOUT 2,000 NEW JOBS IN 2018 ASSUMING NO DOMESTIC RECESSION. RISKS TO THE FORECAST CATEGORICALLY LIE TO THE DOWNSIDE AS PROFOUND STRUCTURAL CHANGE IS APPARENT IN THE CT. ECONOMY 1,600 1,500 1, EEA 1,4271,4391,4291,4461,5201,5581,5981,6381,6671,6661,6241,5551,5261,5311,5441,5621,5841,6131,6431,6691,6931,6811,6651,6451,6501,6621,6811,6981,6991,6271,6081,6241,6381,6501,6621,6741,6791,6821,684 Source: Reflects 3/2018 Data Revisions from Ct Labor Dept Projections from DataCore Partners LLC

26 IT DOESN T FEEL LIKE RECOVERY TO MANY BECAUSE THE HOUSING RECOVERY HAS BEEN MILD

27 CT. SINGLE-FAMILY HOME SALES BY COUNTY, YTD 2017 VS. YTD 2018 (APR 18) RANK ORDERED ON % CHANGE CT SALES DOWN 0.7% YTD YTD2017 YTD2018 % CH FAIRFIELD 2,009 2, % NEW HAVEN 1,871 1, % LITCHFIELD % TOLLAND % HARTFORD 2,152 2, % MIDDLESEX % NEW LONDON % WINDHAM % SOURCE: WARREN GROUP

28 CT. SINGLE-FAMILY HOME PRICES BY COUNTY, YTD 2017 VS. YTD 2018 (APR 18) RANK ORDERED ON % CHANGE CT. MEDIAN SF PRICES, YTD % CHANGE: +5.7% YTD2017 YTD2018 % CH TOLLAND $197,000 $224, % NEW HAVEN $195,000 $215, % NEW LONDON $205,000 $220, % HARTFORD $200,000 $210, % WINDHAM $170,000 $175, % MIDDLESEX $247,000 $253, % FAIRFIELD $425,000 $435, % LITCHFIELD $215,000 $210, % SOURCE: WARREN GROUP

29 3. PERFORMANCE WITHIN THE HARTFORD & SPRINGFIELD AREA ECONOMIES

30 YEAR OVER YEAR % CHANGE IN TOTAL NON-FARM JOBS FOR CT S NINE LABOR MARKET AREAS, APR APR 2018 U.S. SPRINGFIELD DANBURY HARTFORD NORWICH-NL CONNECTICUT EMPLOYMENT WITHIN THE SPRINGFIELD AND HARTFORD LMAS IS VASTLY OUTPERFORMING THAT OF CT. 1.2% 1.0% 0.8% 0.6% 0.5% 1.6% ENFIELD NEW HAVEN DANIELSON NE 0.0% 0.4% 0.4% TORRINGTON NW BPT-STAMFORD WATERBURY -3.0% -2.0% Source: Reflects 3/18 data revisons from CT DOL -0.3% -0.4% -0.9% -1.0% 0.0% 1.0% 2.0% 3.0%

31 JOB EROSION VS. JOB RECOVERY: SPRINGFIELD LMA VS. HARTFORD LMA (APRIL 2018) US SPRINGFIELD NECTA HFD LMA JOB PEAK (000) 138, JOB TROUGH (000) 129, ABSOLUTE LOSS (000) 8, % LOSS: EROSION RATE 6.3% 4.7% 5.8% CURRENT JOBS (000) 148, JOB GAIN FROM LOW (000) 18, % GAIN: RECOVERY RATE * 217.8% 209.2% 112.7% SOURCE: BLS, DATACORE PARTNERS LLC, PRELIMINARY DATA FOR SPRINGFIELD * RECOVERY RATE IS DEFINED AS PERCENTAGE OF TOTAL NON-FARM JOBS RECOVERED VS. THOSE LOST ON A PEAK TO TROUGH BASIS

32 CUMULATIVE HARTFORD LMA JOB LOSSES FROM JUN 2008 PEAK LEVELS TO PRESENT (000) THE HARTFORD LMA LOST 33,100 JOBS FROM JUN 2008-JAN 2010, A 5.8% PEAK/TROUGH JOB LOSS. CURRENT GAIN FROM JAN 2010 BOTTOM: +37,300 JOBS SOURCE: CT. DEPT. OF LABOR DEPT. MONTHS

33 CUMULATIVE SPRINGFIELD JOB LOSSES/GAINS FROM MAR 2008 PEAK LEVELS TO PRESENT (000) SPRINGFIELD NECTA HAS CREATED 31,800 JOBS SINCE THE LOWS. JOB RECOVERY RATE: 209% AS OF APRIL 2018 KEY POINT: MASS. ECONOMIC DEVELOPMENT INITIATIVES ARE WORKING WELL IN EARLY SOURCE: MA. DEPT. OF LABOR DEPT. MONTHS

34 HARTFORD LABOR MARKET AREA RANK ORDERED JOB CHANGE, APR APR 2018 Professional and Business Services 4700 Trans, Warehouse, and Utilities Manufacturing Health Care and Social Assistance Educational Services 500 Construction & Mining 400 Other Information Wholesale Trade Retail Trade Financial Activities HARTFORD LMA TOTAL YR/YR JOB CHANGE, APR 2017 TO APR 2018: +5,500 JOBS, +1.0% (NSA). Government Leisure and Hospitality Sources: CT LABOR DEPT, NSA

35 4. SUMMARY & CONCLUSIONS: ) ) ) ) ) THE CURRENT U.S. ECONOMIC RECOVERY WILL BE 9 YEARS OLD THIS SUMMER. RISK OF U.S. RECESSION NEXT MONTHS? ROUGHLY 1 IN 3 RISKS CATEGORICALLY LIE TO THE DOWNSIDE THE U.S. ECONOMY IS POISED FOR MODEST GAINS OF 2.0%-2.5% IN PROFOUND STRUCTURAL CHANGES ARE RESHAPING THE DOMESTIC ECONOMY, HELPING TO CREATE AN EMERGING NEW ECONOMIC NORMAL. STATE BUDGET ISSUES HAVE UNDERMINED BUSINESS CONFIDENCE AND ARE PROMOTING OUTMIGRATION DATA SHOWS CT. ALREADY LOSING 428 PEOPLE PER WEEK DUE TO DOMESTIC OUTMIGRATION TO OTHER STATES ACCORDING TO NEW 2017 CENSUS DATA. HARTFORD AND SPRINGFIELD AREA ECONOMIES: SPRINGFIELD: STELLAR PERFORMANCE WITH A JRR THAT IS ALMOST TWICE THAT OF HARTFORD: ECONOMIC DEVELOPMENT POLICIES AT THE STATE AND LOCAL LEVEL EXPLAIN THE DIFFERENTIAL SO CONSUMER FUNDAMENTALS WILL BE KEY FOR THE REST OF 2018

36 ) Don Klepper-Smith, Economic Advisor to Farmington Bank Chief Economist and Director of Research, DataCore Partners, Inc., a consulting firm specializing in economic & demographic analysis, market research, and fiscal impact analysis (1996-present) ) Economics Commentator, WTNH Television, New Haven CT ( 2000 to present ) ) ) SNET's Corporate Economist, specializing in economic analysis, economic modeling, demographics & forecasting Over 30 years of experience as a professional economist involving issues of economic importance to CT, having been involved with multiple economic impact analyses, specializing in consumer fundamentals, telecommunications, electric utilities and retail. Fiscal impact analyses present ) Chairman, CT Governor M. Jodi Rell s Council of Economic Advisors, State of Connecticut, ( ) ) Economic Advisor to Governor of State of Connecticut (Rell and Weicker Administrations) ) ) ) Past President: Economic Club of CT and Hartford Area Business Economists, longtime member of NABE, Represented State of CT before multiple Bond Rating agencies on Wall Street, trying to improve State's bond rating MPA from S.U.N.Y at Stony Brook focusing on economics, econometric modeling, statistics & forecasting theory-1978 ) B.S. in Applied Mathematics from S.U.N.Y at Stony Brook ) Clients now include AT&T, CBIA, United Illuminating, Farmington Bank, CERC, State of CT, CT Development Authority, The Workforce Alliance, the U.S Small Business Administration, many CT Towns and Municipalities

QUARTERLY ECONOMIC UPDATE: NEW PERSPECTIVES ON THE U.S, HARTFORD, AND SPRINGFIELD AREA ECONOMIC RECOVERIES

QUARTERLY ECONOMIC UPDATE: NEW PERSPECTIVES ON THE U.S, HARTFORD, AND SPRINGFIELD AREA ECONOMIC RECOVERIES Presented by: Don Klepper-Smith Chief Economist & Director of Research DataCore Partners LLC &