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B
C
    Economic Environment:
T
    Has Connecticut Joined the Recovery?


    Southern New England
    Economic Summit & Outlook 2004

    May 14, 2004

    Todd P. Martin
    Economic Advisor
    People’s Bank
    203.218-9825
    Toddpmartin@Yahoo.com

                                           1
P
B
C   The Fed is on hold … For Now
T

    "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   2
P
B       US Economic Backdrop
C
T   •   The economic momentum that began in the second half of 2003 is carrying
        through into 2004. 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 2004.

    •   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?




                                                                                               3
P
B The economy is on track to grow at 4%+ in 2004
C
T                  Gross Domestic Product (CW$)
     10


      8


      6


      4


      2


      0


      -2


      -4
           89   90   91   92    93    94        95    96     97    98    99     00    01   02   03   04


                     Transformation: %Chg, AR        Source: Bureau of Economic Analysis


  Source: Conference Board,BEA, People’s Bank
                                                                                                          4
P
B   Job growth is finally beginning to pick-up
C
T                            Establishment Employment, Nonfarm
     600

     500

     400

     300

     200

     100

       0

     -100
                 monthly change (thousands) SA
     -200

     -300

     -400
            97     98          99            00              01             02         03   04


                    Transformation: Change        Source: Bureau of Labor Statistics

     Source: Conference Board, BLS, People’s Bank
                                                                                                 5
P
B   Length of job losses is longer than previous periods
C
    % change in employment from peak
T    $ Millions

    10.0%

                          1974                                               Mid 70s
    8.0%
                          1980
                          1990
    6.0%                  2001


    4.0%
                                                                              Early 90s
    2.0%

    0.0%
                                                                                   Early 80s

    -2.0%
                                                    Current

    -4.0%
            1     3   5   7   9   11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45

                                          Number of Months from Peak

     Source: Conference Board, BLS, People’s Bank
                                                                                          6
P
B Major discrepancies between labor surveys
C
T          Household vs. Establishment Survey Change (000's) since 11/01 (SA)
      3,000


      2,500


      2,000
                                                                             + 2.1million

      1,500


      1,000


        500


         -

                                                                               - 323,000
       (500)


      (1,000)
                    Household Survey
                    Establishment Survey
      (1,500)
                   ar

                    r




                                                        ar

                                                          r




                                                                               ar
                                        l




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                    b




                  ay

                    n




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               02 c




                                             g

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                                                        ov

                                                    03 c




                                                                    g

                                                                                p


                                                                               ov

                                                                           04 c
                                       Ju




                                                              Ju
                 Ap




                                                      Ap
             20 De




                                                  20 De




                                                                         20 De
                 Fe




                 Ju




                                                      Fe




                                                      Ju




                                                                             Fe
                 Ja




                                                      Ja




                                                                             Ja
                                            Au

                                                 Se




                                                                   Au

                                                                        Se
                                                      O




                                                                             O
                 M




                                                      M




                                                                             M
                 M




                                                      M
                                                      N




                                                                             N
    Source: The Conference Board, BLS, People’s Bank
                                                                                            7
P
B   Jobless Claims at the lowest level since Jan. 2001
C
T   US Weekly Initial Jobless Claims - 4 week MA

     550.0
     500.0
                                                                                                                         Similar Pattern to early 1990s?
     450.0
     400.0
     350.0
     300.0
     250.0
                                                                                                                                                                                     Below 400,000 for 5-months
     200.0
             Jan -89
                       Ju l -89
                                  Jan -90
                                            Ju l -90
                                                       Jan -91
                                                                 Ju l -91
                                                                            Jan -92
                                                                                      Ju l -92
                                                                                                 Jan -93
                                                                                                           Ju l -93
                                                                                                                      Jan -94
                                                                                                                                Ju l -94
                                                                                                                                           Jan -95
                                                                                                                                                     Ju l -95
                                                                                                                                                                Jan -96
                                                                                                                                                                          Ju l -96
                                                                                                                                                                                     Jan -97
                                                                                                                                                                                               Ju l -97
                                                                                                                                                                                                          Jan -98
                                                                                                                                                                                                                    Ju l -98
                                                                                                                                                                                                                               Jan -99
                                                                                                                                                                                                                                         Ju l -99
                                                                                                                                                                                                                                                    De c-99


                                                                                                                                                                                                                                                                         De c-00


                                                                                                                                                                                                                                                                                              De c-01


                                                                                                                                                                                                                                                                                                                   De c-02


                                                                                                                                                                                                                                                                                                                                        De c-03
                                                                                                                                                                                                                                                              Ju n -00


                                                                                                                                                                                                                                                                                   Ju n -01


                                                                                                                                                                                                                                                                                                        Ju n -02


                                                                                                                                                                                                                                                                                                                             Ju n -03
     Source: Bloomberg, BLS, People’s Bank
                                                                                                                                                                                                                                                                                                                                                  8
P
B   The US creates - and destroys - more jobs
C
T   Total jobs lost & created – 1980 – 1998 – US vs. Europe (millions)

      80                                 73


                                                                  US       Europe
      60


      40
                                                                   29


      20
                                                          4                         4
                                  0
       0


     -20


     -40
               -44

     -60
                     Job Losses               Job Gains                  Net Gain


    Source: Tom Peters “Re-Imagine”                                                     9
P
B Outsourcing                           will continue
C
T 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]




                                                                                                        10
P
B    Productivity is remarkably strong
C
T                           Index, Nonfarm Business Sector, Output per Hour, All Persons
         8



         6



         4



         2



         0



        -2
             89   90   91       92    93    94     95   96     97     98      99     00      01   02   03


                            Transformation: %Chg, YA    Source: Bureau of Labor Statistics

    Source: Conference Board,BLS, People’s Bank
                                                                                                            11
P
B   Consumers are worried about jobs & Iraq
C
T   1985=100                        Cons. Confid. Index, Composite
     150




     100




     50




      0
           90   91   92     93     94     95      96      97     98    99     00      01   02   03   04


                          Transformation: Level        Source: The Conference Board

           Source: The Conference Board, People’s Bank
                                                                                                          12
P
B      Capital Spending has rebounded nicely
C
T                                 Investment, Equipment and Software (CW$)
          20


          15


          10


           5


           0


          -5


         -10
               91   92    93     94      95     96    97     98      99     00      01     02   03   04


                         Transformation: %Chg, YA    Source: Bureau of Economic Analysis

    Source: Conference Board,BEA, People’s Bank
                                                                                                          13
                                                                                         T
                                                                                         P

                                                                                         C




                                         0
                                             2000
                                                    4000
                                                           6000
                                                                  8000
                                                                         10000
                                                                                 12000
                              1/3/1997

                              4/3/1997

                              7/3/1997

                             10/3/1997

                              1/3/1998

                              4/3/1998

                              7/3/1998

                             10/3/1998

                              1/3/1999

                              4/3/1999

                              7/3/1999




Source: MBA, People’s Bank
                             10/3/1999

                              1/3/2000

                              4/3/2000

                              7/3/2000

                             10/3/2000

                              1/3/2001

                              4/3/2001
                                                                                                             Mortgage Refinace Index




                              7/3/2001

                             10/3/2001

                              1/3/2002

                              4/3/2002

                              7/3/2002

                             10/3/2002

                              1/3/2003

                              4/3/2003

                              7/3/2003
                                                                                         B Mgt. Refinance activity slows dramatically




                             10/3/2003

                              1/3/2004

                              4/3/2004
14
P
B Home sales are at record high levels
C
T US New & Existing HomeHousing Sales, New and Existing Homes
                         Sales - millions of units (SAAR)
       8



       7



       6



       5



       4



       3
           89   90   91   92    93     94    95    96   97     98     99    00    01   02   03   04


                           Transformation: Level   Source: Bureau of the Census


    Source: Conference Board, Bloomberg, People’s Bank                                                15
P
B Housing affordability is still historically high
C
T                Index, Housing Affordability
     150



     140



     130



     120



     110



     100
           90   91   92   93    94     95     96   97    98    99      00   01   02   03   04


                           Transformation: Level   Source: WEFA, NAR

    Source: Conference Board, NAR, People’s Bank                                                16
P
B   ISM index at a 20-year high - Strong orders
C
T   Institute of Supply Management Survey Index
                            Purchasing Managers' (formally NAPM)
       70




       60




       50




       40




       30
            89   90   91   92   93    94     95    96   97   98    99   00   01   02   03   04


                                Transformation: Level   Source: NAPM

       Source: Conference Board, ISM, People’s Bank
                                                                                                 17
P
B Fed funds usually track nominal GDP growth
C
T         Targeted Fed Funds vs. Nominal GDP Growth (YOY%)
      11




      9




      7




      5




      3




      1
           86   87   88   89   90     91     92   93   94   95    96     97     98    99   00   01   02   03


                                    Nominal GDP                  Targeted Fed Funds


      Source: Conference Board, Bloomberg, People’s Bank                                                       18
P
B Targeted fed funds rate less nominal GDP growth
C
T                 Fed Funds less Nominal GDP
     4

     3

     2

     1

     0

    -1

    -2

    -3
                                                     The Gap has never been wider
    -4

    -5
         86   87   88   89   90   91    92    93    94    95      96   97    98   99   00   01   02   03


                                  Transformation: Level        Source: N/A

    Source: Conference Board, Bloomberg, People’s Bank                                                     19
P
B Core Inflation rate beginning to move higher?
C
T                CPI vs. CPI less Food & Energy
    15


              YOY% change                                “core” inflation rate the
                                                         lowest since early 1960s,
                                                         up just 1.1% YOY

    10




     5




     0
         66            73         80       87                  94             01

                            CPI                 CPI less F&E


    Source: Conference Board, Bloomberg, People’s Bank                               20
P
B       CT Economic Outlook
C
T   •    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
         2005. 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 2003 -- the strongest since 1999. Not
         overbuilt like the late 1980s.

    •    CT vulnerable to national (and global) economy, stock market, energy
         prices, and deteriorating state fiscal condition.




                                                                                    21
P
B   CT unemployment rate is well below the US rate
C
T                                    Unemployment Rate CT vs. US
     10


                                        % of labor force (SA)


      8




      6




      4




      2
          89   90   91   92     93      94     95    96   97    98      99        00   01   02   03   04

                              Unemployment Rate CT         Unemployment Rate US


     Source: CT Labor Department
                                                                                                           22
P
B CT Job growth lags the US and is still neg. YOY
C
T           CT vs. US Employment Growth YOY% change
     6

     5
                                             % of labor force (SA)
     4

     3

     2

     1

     0

    -1

    -2

    -3

    -4

    -5
         83   84   85   86   87   88   89    90   91   92   93   94   95   96   97    98   99   00   01   02   03   04


                                  CT Non-Farm Employment          US Non Farm Employment



     Source: CT Labor Department, the Conference Board
                                                                                                                         23
P
B   CT has lost 62,000 jobs since July 2000 peak
C
T                [Thousands]               CT Non-Farm Employment
     1700

                                            % of labor force (SA)

     1650




     1600




     1550




     1500
            88      89   90    91   92     93    94    95   96    97    98    99       00   01   02   03   04


                               Transformation: Level    Source: CT Labor Dept., User

     Source: CT Labor Department, the Conference Board
                                                                                                                24
P
B   CT construction employment levels-off
C
T               [Thousands]
                                     Connecticut, Employment, Construction
      90



      80



      70



      60



      50



      40
           88      89   90     91     92     93       94     95     96     97     98     99     00   01   02


                              Transformation: Level        Source: Bureau of Labor Statistics


     Source: CT Labor Department, the Conference Board
                                                                                                               25
P
B   CT Manufacturing has been the hardest hit sector
C
T                [Thousands]           Connecticut, Employment, Manufacturing
      305



      274



      243



      212



      181



      150
            90      91   92       93     94     95     96    97     98      99     00        01   02   03   04


                               Transformation: Level    Source: Bureau of Labor Statistics

     Source: CT Labor Department, the Conference Board
                                                                                                                 26
P
B   CT Manufacturing still shedding 8,000 jobs a year
C
T    [Change - Thousands]        Connecticut, Employment, Manufacturing
      10


       5


       0


      -5


     -10


     -15


     -20
           91   92   93     94       95    96     97     98      99      00      01    02   03   04


                      Transformation: Chg, YA     Source: Bureau of Labor Statistics

     Source: CT Labor Department, the Conference Board
                                                                                                      27
P
B   CT Service sector is where job growth has been
C
T               [Thousands]         Connecticut, Employment, Services
      550.00




      500.00




      450.00




      400.00
               89   90   91    92     93     94   95     96      97     98     99      00   01   02


                          Transformation: Level   Source: Bureau of Labor Statistics

     Source: CT Labor Department, the Conference Board
                                                                                                      28
P
B CT Claims are moving in the right direction
C
T              CT Average Weekly Initial Unemployment Claims
       9000.00


       8000.00


       7000.00


       6000.00


       5000.00


       4000.00


       3000.00
                 90   91   92    93     94     95   96     97     98     99     00       01   02   03   04


                           Transformation: Level    Source: Ct Dept. of Labor, U, User

      Source: CT Labor Department
                                                                                                             29
P
B   Unemployment rates up sharply from 2000
C
T   CT Unemployment Rates % by Labor Market Area (NSA)
                                               2.3
       Waterbury                                                                               6.8
                                               2.3
       Bridgeport                                                                      6.1
                                               2.3
       Danielson                                                                5.7
                                         2.0
         Hartford                                                               5.6
                                         2.0
      New Haven                                                           5.0
                                  1.5
       Torrington                                                        4.9
                                        1.9
     New London                                                         4.7
                                1.3
      Lower River                                                3.7
                                1.3
                                                                                             8/31/2000
         Danbury                                             3.5                             3/31/2004
                            1.1
        Stamford                                           3.3

                    0.0   1.0           2.0          3.0          4.0   5.0      6.0           7.0       8.0

       Source: CT Labor Dept.                                                                             30
P
B   CT Job losses across the board YOY
C
    Change in CT Non-Farm Employment March 2004 vs. March 2003 ( Not SA)
T
                            Utilities                                                                                       -200
               General Merchandise                                                                                          -200
                   Wholesale Trade                                                                                          -200
               Electrical Equipment                                                                                         -200
                            Utilities                                                                                     -300
                         Local Gov.                                                                                  -400
                          Insurance                                                                                  -400
            Food & Beverage Stores                                                                                 -500
                  Printing & Related                                                                            -600
                       Federal Gov.                                                                           -700
                         Chemicals                                                                            -700
                        Information                                                                   -900
                   Fabricated Metal                                                                    -900
           Other Non-Durable Goods                                                                -1,000
          Transportation Equipment                                                          -1,200
     Computer & Electronic Product                                                       -1,300
                         Machinery                                             -1,600
                         State Gov.                 -2,700
    Professional & Business Services       -3,000

                                  -3,500      -3,000         -2,500   -2,000            -1,500       -1,000          -500          0



       Source: CT Labor Department
                                                                                                                                   31
P
B     Fewer industries adding jobs in CT YOY
C
T    Change in CT Non-Farm Employment March 2004 vs. March 2003 ( Not SA)


    Accommodation & Food Services                                                       2,600

     Health Care & Social Assistance                                        1,900

              Arts, Ent. & Recreation                       1,000

              Construction & Mining                         1,000

               Educational Services                 500

                     Other Services               400

     Real Estate & Rental & Leasing               400

               Credit Intermediation              400

      Transportation & Warehousing                400

            Securities & Commodity            300

                        Other Retail        200

       Motor Vehicle & Parts Dealers        200


                                        0         500     1,000     1,500   2,000   2,500       3,000   3,500



          Source: CT Labor Department
                                                                                                          32
P
B Housing permits very strong so far in 2004
C
T % Change in CT New Housing Permits Authorized YTD January - March 2004 vs. 2002 by LMA
        C o nne c t ic ut                        29.3%

          B ridge po rt                                                                    128.2%
             D a nbury                                          70.5%
           Wa t e rbury                              45.1%
        N e w Lo ndo n                           29.7%
           D a nie ls o n                      21.4%
             H a rt f o rd                    18.0%
          T o rringt o n                     12.5%           Permits totaled 9,985 last year,
                                                             the strongest since 1999 and the
            S t a m f o rd                 7.8%              3rd strongest since 1989. Total
         N ew H aven                    0.0%                 2,176 YTD in 2004 vs. 1,683 in
                                                             2003.
        Lo we r R iv e r     -25.0%


                     -50.0%           0.0%           50.0%           100.0%                 150.0%
          Source: CT DECD
                                                                                                     33
                                                                                                                                                                      T
                                                                                                                                                                      P

                                                                                                                                                                      C
                                                                                                                                                                      B




                                                                                                10,000.0
                                                                                                             15,000.0
                                                                                                                         20,000.0
                                                                                                                                    25,000.0
                                                                                                                                                30,000.0
                                                                                                                                                           35,000.0




                                                                                      5,000.0
                                                                                0.0
                                                                        19
                                                                           83
                                                                        19                                              16,927
                                                                           84
                                                                        19                                                    19,392
                                                                           85
                                                                        19                                                                     26,246
                                                                           86
                                                                        19                                                                             30,163
                                                                           87
                                                                        19                                                                      27,415
                                                                           88
                                                                        19                                                     19,547
                                                                           89
                                                                        19                                  11,970
                                                                           90
                                                                        19                      7,580
                                                                           91
                                                                        19                      7,480
                                                                           92
                                                                        19                      8,010
                                                                           93
                                                                        19                           9,250
                                                                           94
                                                                        19                           9,460
                                                                           95




 Source:CT DECD, New England Economic Project
                                                                                                  8,550
                                                                                                                                                                      Total housing permits authorized in CT in units




                                                                        19
                                                                           96
                                                                        19                        8,537
                                                                           97
                                                                        19                           9,311
                                                                           98
                                                                        19                                  11,863
                                                                           99
                                                                        20                                 10,637
                                                                           00
                                                                        20                           9,376
                                                                           01
                                                                        20                           9,290
                                                                           02
                                                                        20                            9,731
                                                                           03
                                                                        20                             9,985
                                                                           04
                                                                        20                        8,658
                                                                           05
                                                                        20                        8,620
                                                                           06
                                                                        20                         8,770
                                                2004-2007 is forecast




                                                                           07
                                                                                                  8,662
                                                                                                                                                                                                                        Housing is not overbuild like the mid-1980s




34
P
B   Auto registrations down 4.4% YTD
C
T   Connecticut New Auto Registrations Processed YTD - (January - March)




      Source: CT Labor Department                                          35
P
B   Tax revenues up 6.9% this year
C
T   Year-to-Date % change in CT Tax Revenues ( FY 03-04 vs. FY 02-03 July - March)


               Total                                                 6.9%    Up $419 million




           Cigarette                                                                  22.2%

             Income                                                           15.1%

         Motor Fuel                                                 5.5%

    Real Estate Conv.                                              4.7%

        Sales & Use                                               2.6%

     Corp. Business                     -13.9%

                  -40.0%   -30.0%    -20.0%      -10.0%    0.0%      10.0%     20.0%      30.0%

        Source: State of CT Dept. of Revenue Services
                                                                                               36
P
B   Summary
C   • Economic growth continues to improve in 2004 due to: low rates - fiscal
T     stimulus - productivity - corporate profits - capital spending - weaker dollar

    • Fed’s “Patience” is coming to and end – tightening of monetary policy
      should begin by August 2004.

    • Connecticut economic growth has lagged the US - meaningful job
      growth not likely until 2005 - 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

                                                                                 37
P
B
C
T



                             For more information...



    Please visit our web site at www.peoples.com




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