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 ( December 2017 Webinar Based on October 2017 data

2 TOPICS 1. THE CURRENT U.S. BUSINESS CYCLE AND KEY FUNDAMENTALS 2. THE CONNECTICUT ECONOMY: THE HEALTH OF LOCAL LABOR MARKETS AND BUDGET ISSUES 3. PERFORMANCE WITHIN THE HARTFORD AND SPRINGFIELD AREA ECONOMIES 4. SUMMARY AND CONCLUSIONS

3 1. THE CURRENT U.S. BUSINESS CYCLE AND KEY FUNDAMENTALS

4 POSITIVE #1: U.S. RECESSION IS UNLIKELY OVER THE NEAR-TERM THE AGGREGATE BODY OF U.S. ECONOMIC DATA SUGGESTS THAT MODEST ECONOMIC RECOVERY IS LIKELY TO CONTINUE THROUGH AT LEAST THE END OF 2017 AND POSSIBLY LONGER. THE ODDS OF A FULL-BLOWN DOMESTIC RECESSION OVER THE NEXT MOS AT THIS POINT ARE LOW AT ROUGHLY 1 IN 3

5 DATACORE ASSESSMENT OF THE U.S. ECONOMY: Two more years of subpar growth in "The good news is that the current U.S. expansion is eight years old this past summer, quite a bit longer than the average post-war recovery of five years. Looking at the components of real GDP- consumption, investment, govt spending and net exports- we see that the U.S. economy grew at a SAAR of 3% in 3Q2017 after gains of 2.4%, 2.6%, and 1.6% over the last three years. The outlook for 2018 is clouded with uncertainty, but will be a function of: 1 proposed tax cuts, 2 emerging trade policies, and 3 proposed rollbacks on federal government regulations, which are designed to spur new business investment. Present economic fundamentals clearly argue for another two years of modest growth in the range of 2%-2.5% (up 3% SAAR 3Q17, up 2.2% YTD. BOTTOM LINE: With political gridlock in Washington and reduced odds for another fiscal stimulus package or an infrastructure bill, chances are that monetary policy will continue to err on the side of caution, meaning a more tempered rise in short-term rates from the Federal Reserve.

6 THE ROLE OF STRUCTURAL CHANGE: "Essentially, structural change relates to those factors within the domestic economy which are NOT related to, and operate independent of, the U.S. business cycle. Structural changes have to be understood in their scope and magnitude in impacting today s economy because many of these same factors will also be affecting future levels of growth. Often unappreciated by federal and state policymakers, these structural changes have had profound and significant effects on levels of economic growth and have vastly reshaped our economic landscape over time. As a result, policy options are far more complicated and challenging - Don Klepper-Smith Chief Economist and Director of Research DataCore Partners

7 FACTORS INVOLVING STRUCTURAL CHANGE : COSTS OF DOING BUSINESS GLOBALIZATION & ECONOMIC POLARIZATION GROWING TRENDS TOWARDS PRIVATIZATION AND OUTSOURCING THE SUBSTITUTION EFFECT OF CAPITAL FOR LABOR GREATER USE OF TEMPORARY WORKERS DEMOGRAPHIC SHIFTS, THE AGING OF THE BABY BOOMER GENERATION, AND POSSIBLY DELAYED RETIREMENTS INCREASED USE OF THE INTERNET AND E-COMMERCE UNDERFUNDING OF STATE AND LOCAL PENSION FUNDS DISPARITIES BETWEEN BETHE PUBLIC/PRIVATE SECTORS ROBOTICS AND ARTIFICIAL INTELLIGENCE DISPLACES LABOR

8 Amazon: Capturing Market Share in Retail Amazon only boasts a mere 5 percent share of total retail sales, excluding food, across the country, according to data from the U.S. Census Bureau. But Amazon's market share is expected to rapidly accelerate,

9 POSITIVE #2: CONSUMER FUNDAMENTALS ARE GENERALLY POSITIVE U.S.CONSUMER CONFIDENCE CONTINUES TO RISE AND IS UP 22% YTD AS OF NOVEMBER. CONFIDENCE FOR THE NEW ENGLAND REGION IS UP 16% YTD. THE U.S. ECONOMY CONTINUES TO CREATE JOBS AT A MODERATE CLIP DESPITE THE LOSS OF 228,000 JOBS IN NOVEMBER, REBOUNDING FROM THE TWO HURRICANES. THE U.S. ECONOMY HAS CREATED 17.5 MILLION JOBS SINCE THE LOWS IN EARLY 2010 AND NOW HAS A JOB RECOVERY RATE OF 201.3% GIVEN NOVEMBER DATA

10 CONSUMER CONFIDENCE (U.S. VS. NEW ENGLAND, JAN 88- NOV 2017 CONSUMER CONFIDENCE INDICES (85=100 U.S. CONSUMER CONFIDENCE AS OF NOV 2017: UP 22% ON A YTD BASIS. " " " " " "" " "" " " " " " "" " " """ " " " "" " " " "" " " " "" "" " "" " "" " " " "" " " " " " " " "" " " " " " " " "" " " " " " " " " " "" " " " " "" " " " " " " " " """" " " " " """ "" " " " " " "" """ "" """ " "" " " " "" "" " "" " " """ " " "" " " " " "" " " " " " '00'01'02'03'04'05'06'07'08' NEW ENGLAND CONFID. " U.S. CONFIDENCE SOURCE: CONFERENCE BOARD

11 500 U.S. JOBS LOST/GAINED (000 MONTHLY U.S. JOB GROWTH & UNEMPLOYMENT SINCE 3/91 U.S UNEMPLOYMENT (% TOTAL NON-FARM JOBS ROSE BY 228,000 IN NOV OFFICIAL U-3 UNEMPLOYMENT RATE: 4.1% MONTHS 3.5 SOURCE: U.S. DEPT. OF LABOR NON-FARM EMP UNEMPLOYMENT %

12 "MISERY INDEX" (SUM OF THE ANNUAL INFLATION AND UNEMPLOYMENT RATES, MISERY INDEX THE CPI-I NO LONGER HAS A HOUSING COMPONENT, BUT A RENTAL EQUIVALENT. FCST UNEM CPIU SOURCES: U.S. DEPT. OF LABOR NOTE: DATACORE PARTNERS FORECAST BEGINS IN 2017 CPIU UNEM

13 10-YEAR U.S. GOVT BOND YIELD

14 2.THE CONNECTICUT ECONOMY: THE HEALTH OF LOCAL LABOR MARKETS, & BUDGET ISSUES

15 CT. COMPANY PERFORMANCE: Q: Current outlook for your firm? OPTIMISM OUTWEIGHS PESSIMISM 2:1 1Q2015 2Q2015 3Q2015 4Q2015 1Q2016 2Q2016 3Q Q2016 1Q2017 Improve significantly Improve somewhat Remain stable Worsen somewhat Worsen significantly 6% 3% 3% 6% 6% 6% 3% 5% 7% 33% 31% 31% 24% 24% 29% 23% 35% 30% 51% 52% 48% 57% 49% 49% 49% 39% 47% 8% 13% 15% 11% 18% 16% 22% 19% 15% 3% 0% 2% 2% 1% 1% 2% 2% 1% SOURCE: CBIA MEMBERSHIP SURVEY, PERCENTAGES ROUNDED

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 FARMINGTON BANK BUSINESS BAROMETER (YEAR OVER YEAR % CHANGE % CHANGE- YR/YR (1970Q1-2017Q4 The FBBB shows the CT economy slowing in 2017 with a mild 0.2% YTD rise through October after a 0.8% rise in YR/YR CHANGE-FBBB YEARS Note: Reflects March 2017 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 is expected to see a fractional gain in 2017 of 0.4% barring domestic recession, after a mild 0.8% climb in 2016, still well below our long-term average annual growth rate of 2.5% FBBB REAL GDP FBBB REAL GDP Source:DataCore Partners LLC, U.S. Commerce Dept., Note: Reflects March 2017 Data Revisions; Forecast Begins 2017 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 FORECAST: +0.5%, 2018 FORECAST: +0.3% EXPECT DOWNSIDE REVISIONS TO 2017 DATA PI: +1.1% YTD Series 3 Series %CH RDI %CH RDI Source: U.S. Commerce Dept., CT. Labor Dept., BEA, DataCore Partners LLC, Revised August 2017 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 JOB EROSION VS. JOB RECOVERY: ALL SIX NEW ENGLAND STATES OCTOBER 2017 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 ( % 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 % 101.0% 321.2% 193.5% 100.3% 151.0% SOURCE: BLS, DATACORE PARTNERS LLC, REFLECTS 3/17 CT DOL DATA REVISIONS * RECOVERY RATE IS DEFINED AS PERCENTAGE OF JOBS RECOVERED VS. THOSE LOST ON A PEAK TO TROUGH BASIS

21 CUMULATIVE CT. JOB LOSSES FROM March 2008 PEAK LEVELS TO PRESENT (000 CT LOST 119,100 JOBS PEAK TO TROUGH. CURRENT LOSS FROM PEAK: -32,700 (OCT SOURCE: CT. DEPT. OF LABOR DEPT. MONTHS

22 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: -32,700 (OCT ASSUMING THE CURRENT AVG. GROWTH RATE OF LESS THAN 1,000 NEW JOBS EACH MONTH, THE CT. JOB MARKET WILL NOT FULLY RECOVER UNTIL SOMETIME IN 2020 ASSUMING CURRENT DATA AND THE CURRENT PACE OF GROWTH MONTHS SOURCE: DATACORE PARTNERS LL, CT. DEPT. OF LABOR DEPT., REFLECTS 3/17 DOL REVISIONS

23 CT. SINGLE-FAMILY HOME SALES BY COUNTY, YTD 2016 VS. YTD 2017 (OCT 17 RANK ORDERED ON % CHANGE CT SALES UP 6.9% YTD YTD2016 YTD2017 % CH NEW LONDON 2,200 2, % MIDDLESEX 1,469 1, % TOLLAND 1,181 1, % LITCHFIELD 1,686 1, % HARTFORD 6,919 7, % WINDHAM 1,016 1, % NEW HAVEN 6,027 6, % FAIRFIELD 6,716 6, % SOURCE: WARREN GROUP

24 CT. SINGLE-FAMILY HOME PRICES BY COUNTY, YTD 2016 VS. YTD 2017 (OCT 17 RANK ORDERED ON % CHANGE CT. MEDIAN SF PRICES, YTD % CHANGE: +0.6% YTD2016 YTD2017 % CH NEW LONDON $211,000 $224, % WINDHAM $170,000 $179, % FAIRFIELD $430,000 $444, % LITCHFIELD $219,750 $225, % MIDDLESEX $260,000 $265, % NEW HAVEN $217,000 $220, % HARTFORD $220,000 $219, % TOLLAND $220,000 $218, % SOURCE: WARREN GROUP

25 CT. NEW HOUSING UNITS AS AUTHORIZED BY RES. BUILDING PERMITS, YTD UNITS ARE DOWN 13% AS OF OCT 2017 AND RUNNING AT A 12 MONTH MA OF ABOUT 3600 UNITS.

26 POSITIVE #3: THE GOOD NEWS IS THAT CT FINALLY HAS A BUDGET THAT WAS PASSED WITH BI-PARTISAN SUPPORT. IN ADDITION TO AVOIDING INCOME TAX AND SALES TAX INCREASES, THIS BUDGET INCLUDES AN IMPROVED SPENDING CAP, A STRONGER CAP ON BORROWING, NEW RULES ON REQUIRED VOTES FOR UNION CONTRACTS. AND CHANGES TO BINDING ARBITRATION. MOUNTING FISCAL PROBLEMS HAVE FINALLY PROMPTED POLICYMAKERS TO TAKE A HARD LOOK AT THE STRUCTURAL PROBLEMS UNDERLYING THE STATE S ECONOMY. THIS IS A BIG FIRST STEP IN CT S PATH TO FISCAL DISCIPLINE, WHICH WILL HOPEFULLY PRODUCE FUTURE BUDGETS THAT ALLOW THE STATE S ECONOMY TO GROW AS WE ALL KNOW, THERE ARE NO EASY ANSWERS WHEN IT COMES TO AN OPTIMAL MIX OF TAX INCREASES AND SPENDING CUTS. SHORTFALL IN CURRENT BUDGET: $207 MILLION.

27 DATACORE ANALYSIS OF CT. S FISCAL SITUATION: There's clearly been an escalating "crisis of confidence" in Connecticut's business community that's been long ignored, and it's not going to turn around quickly. Research shows that both business confidence and consumer confidence don't turn on a dime, and that it takes many years to rebuild confidence once it's lost. The present lack of fiscal discipline in state and local finances is clearly one contributing factor. With State and local expenditures rising 3%, 4%, and 5% annually due to generous wage and benefit packages, and many taxpayers on fixed incomes earning 1%-2%, it doesn't take a degree in math to understand that "mounting fiscal stress" is already baked into Connecticut's fiscal picture over the next ten to fifteen years. - Don Klepper-Smith Chief Economist DataCore Partners LLC

28 BASIC ECONOMICS: THE LAFFER CURVE A strong argument can be made that we are presently "cannibalizing" our state and local tax base. The Laffer Curve below illustrates why the State is now encountering declining tax revenues and why we now have an average of over 500 people leaving Connecticut each week to other states. The Laffer Curve shows the relationship between tax rates, tax revenue, and taxable income. It is frequently cited by economists who want to explain the common-sense notion that punitive tax rates may not generate much additional revenue if people respond in ways that result in less taxable income. The aggregate body of data for CT clearly shows we have passed the so called "revenue maximizing point" and are now in what many economists would refer to as "the unproductive zone" where aggregate tax revenues are declining. Despite significant tax hikes in many areas, CT Total State Tax Revs: UNCHANGED YTD (JULY 2017 CED. THEREFORE THE LAFFER CURVE IS ARGUING FOR SPENDING CUTS OVER TAX INCREASES

29 CT. IS NOW LOSING 574 PEOPLE EVERY WEEK TO OTHER STATES DUE TO DOMESTIC OUTMIGRATION: Source: U.S. Census Bureau, Wall Street Journal

30 Connecticut Now Ranks Second In Overall Tax Burden By Stephen Singer, Hartford Courant, March 13, Taxpayers worked nearly five months for the government last year, according to a tax research organization. Not until May 21 - "Tax Freedom Day" - according to the Tax Foundation of Washington, D.C., did CT's taxpayers earn enough to pay federal, state and local taxes for the year....that ranked CT No. 50 among the states in how long it took taxpayers to pay all their taxes. And it was unchanged from 2015, though taxpayers earned enough by May 13 to pay all their taxes...ct ranked high - No. 2 - in the overall tax burden, according to the Tax Foundation. State and local taxes per person were $7,869, or nearly 13 percent of state income in 2012, the most recent year census data were available..

31 3. PERFORMANCE WITHIN THE HARTFORD & SPRINGFIELD AREA ECONOMIES

32 YEAR OVER YEAR % CHANGE IN TOTAL NON-FARM JOBS FOR CT S NINE LABOR MARKET AREAS, OCT OCT 2017 SPRINGFIELD U.S. 1.4% 1.8% NEW HAVEN BRIDGEPORT-STAMFORD DANBURY ENFIELD DANIELSON NE TORRINGTON NW NORWICH-NL CONNECTICUT HARTFORD WATERBURY EMPLOYMENT WITHIN THE SPRINGFIELD LMA IS VASTLY OUTPERFORMING OTHER REGIONS, UP 1.8% YR/YR AS OF October 2017 HARTFORD: -0.2%. -0.2% -0.4% 0.7% 0.7% 0.6% 0.4% 0.4% 0.3% 0.2% 0.1% -3.0% Source: Reflects OCT 2017 data from CT DOL -2.0% -1.0% 0.0% 1.0% 2.0% 3.0%

33 JOB EROSION VS. JOB RECOVERY: U.S. VS. CONNECTICUT AND HARTFORD LMA- (OCT 2017 US CT HFD LMA JOB PEAK ( , JOB TROUGH ( , ABSOLUTE LOSS (000 8, % LOSS: EROSION RATE 6.3% 7.0% 5.8% CURRENT JOBS ( , JOB GAIN FROM LOW (000 17, % GAIN: RECOVERY RATE * 198.7% 72.5% 99.7% SOURCE: BLS, DATACORE PARTNERS LLC, REFLECTS 3/17 CT DOL DATA REVISIONS * RECOVERY RATE IS DEFINED AS PERCENTAGE OF JOBS RECOVERED VS. THOSE LOST ON A PEAK TO TROUGH BASIS

34 CUMULATIVE HARTFORD LMA JOB LOSSES FROM JUN 2008 PEAK LEVELS TO PRESENT ( 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: +33,000 JOBS SOURCE: CT. DEPT. OF LABOR DEPT. MONTHS

35 HARTFORD LABOR MARKET AREA RANK ORDERED JOB CHANGE, OCT OCT 2017 Professional and Business Services 3200 Health Care and Social Assistance Trans, Warehouse, and Utilities Manufacturing 700 Wholesale Trade 400 Other 100 Information Construction & Mining Financial Activities Educational Services Retail Trade HARTFORD LMA TOTAL YR/YR JOB CHANGE, OCT 2016 TO OCT 2017: -1,000 JOBS, -0.2% (NSA. Government Leisure and Hospitality Sources: CT LABOR DEPT, NSA

36 JOB EROSION VS. JOB RECOVERY: SPRINGFIELD LMA VS. HARTFORD LMA (OCT 2017 US SPRINGFIELD NECTA HFD LMA JOB PEAK ( , JOB TROUGH ( , ABSOLUTE LOSS (000 8, % LOSS: EROSION RATE 6.3% 4.7% 5.8% CURRENT JOBS ( , JOB GAIN FROM LOW (000 17, % GAIN: RECOVERY RATE * 198.7% 228.9% 99.7% 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

37 4. SUMMARY & CONCLUSIONS: THE CURRENT U.S. ECONOMIC RECOVERY WAS 8 YEARS OLD AS OF THIS PAST 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 WE RE ALREADY LOSING 574 PEOPLE PER WEEK DUE TO DOMESTIC OUTMIGRATION TO OTHER STATES DATA DUE 1Q 2018 HARTFORD AND SPRINGFIELD AREA ECONOMIES: HARTFORD: ADDING JOBS AT A MODEST PACE, NOW WITH A JRR OF 100%, OUTPERFORMING THE STATE AVERAGES. SPRINGFIELD: STELLAR PERFORMANCE WITH ALMOST 35,000 NEW JOBS AND A JRR THAT IS MORE THAN TWICE THAT OF HARTFORD: 100% VS. 229%. ECONOMIC DEVELOPMENT POLICIES AT THE STATE AND LOCAL LEVEL EXPLAIN THE DIFFERENTIAL

38 Q: WHAT DOES THE FUTURE HOLD FOR THE U.S. AND CONNECTICUT ECONOMIES?

39 TODAY S ECONOMY IS HIGHLY LEVERAGED

40 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