Steven P. Lanza

English

Research Papers in Economics

12 The Connecticut Economy Winter 2002
In Connecticut’s Service Economy Recession,
the Commodity Sector Have Got the Goods 
By Steven P. Lanza
Connecticut, along with the rest of the nation,
has slipped into recession.  By historical standards
this slump seems, well, average.  But a little digging
unearths some key anomalies.  In the U.S., the
recession didn’t start like most others, with con-
sumer spending grinding to a halt.  This time, jittery
business firms sent the economy into a nosedive.
And in Connecticut, typically pro-cyclical sectors of
the economy are holding up fairly well, while sectors
that often show the greatest resilience are pulling
the economy down.  The services sector, the state’s
prime engine of growth in the 1990s, has taken a
sharp hit early in this recession.  Construction and
manufacturing, by contrast, are clinging to above-
trend activity levels.  So, it seems that when it comes
to helping prop up the state’s economy, those two
old-fashioned, tangible-commodity producing sec-
tors have still got the goods. 
What’s Normal?
If the last five business cycles are any guide,
Connecticut gets the flu when the U.S. catches a
cold.  Recessions typically last about 11 months for
the nation as a whole but drag on 4 months longer
in Connecticut.  Perhaps the best, and certainly the
most timely, measure of overall economic activity
is employment.  Peak to trough, employment usu-
ally drops by 2.4% in Connecticut recessions, ver-
sus only 1.2% nationally.  Until the 1990s,
Connecticut took about as long as the U.S. to fully
recover the jobs lost during a recession—upwards
of 13 months from when the economy finally bot-
toms out.  But the slow recovery from its Great
Recession early last decade pushed up the state’s
average recuperation time
to 22 months (see chart).
Because the present
recession began in the
first half of last year, his-
tory would tell us that
Connecticut is about mid-
way through the slump
and should expect a turn-
around to begin by 2002-
Q3.  But a full recovery
takes time, so even with
an early start, the econo-
my could still be shaking
off the effects of the
downturn into the last half of 2003 or even the first
half of 2004.
Sensitive Types
The effects of recession are never distributed
evenly across sectors.  Some industries are more
sensitive to the business cycle than others.  But the
pattern may vary from slump to slump, and it may
evolve over time as the structure of the economy
changes.  What light do previous business cycles
shed on the current recession?
Historically, changes in goods-producing sectors
like manufacturing and construction have been
highly correlated with changes in employment
across the entire economy.  Moreover, these sectors
have tended to lead the Connecticut and national
economies in their ups and downs.  Somewhat
lower correlations exist for services, retail trade,
and transportation-and-public-utilities (TPU).
Some services, like education and health, have
small positive or even negative correlations, indi-
cating they hold up fairly well in a recession.
That’s because people hurt by hard times often
return to school to pick up a new skill or see a
doctor about their aches and pains.  Also likely to
scrape by tolerably well in a slump are low-correla-
tion, lagging sectors like government, wholesale
trade, and finance-insurance-and-real-estate (FIRE).
The table below shows the actual correlations
between economy-wide and sectoral employment
changes for the period 1969-2000, based on Bureau
of Economic Analysis data for both the U.S. and
Connecticut.  
Though these relationships have proved fairly
steady, not all correlations have held constant over
time.  Take communications—jobs in television,
radio, telephone, and cable.  Until 1989, the corre-
lation between communications and the rest of the
U.S. economy was only 0.04 ; since then, it has
soared to 0.71.  In Connecticut, the comparable
measure grew from 0.20 to 0.84.  In both cases the
difference is statistically significant and implies
that the communications industry has become
highly correlated with the business cycle—an
understandable consequence of the structural shift
to an information economy.  Also signalling the
changing times, the correlation coefficients for eat-
ing-and-drinking places, hotels, and securities-and-
Paths to Recovery
The graph shows the path of the current recession, and the path the economy would
be taking if this recession followed the average of the last five, or the four before
Connecticut’s Great Recession of the 1990s. Employment peaks are indexed to 100.
How Industries Measure Up13 The Connecticut Economy Winter 2002
commodities brokers have flip-flopped from close
to zero to nearly one—a reflection of an economy
on the move both physically and financially.
Going Through A Phase?
That is the historical backdrop, but what is the
temper of the current recession?  
A check of recent employment patterns suggests
that some key industries may be veering off in new
directions.  To show this requires looking at more
than just positive and negative movements in jobs.
It requires comparing actual job numbers to their
long-term trends, so the cyclical employment paths
for each industry can emerge.  The actual cyclical
index is formed by calculating the ratio of actual
levels of seasonally-adjusted employment (that is,
with effects like Christmas-season hiring removed)
to long-term trend levels of employment.  When
industry activity is near a peak and job totals are
above trend, the index will exceed 100.
Conversely, when industry activity is near a trough
and jobs are below trend, the index will register
below 100.
Comparing cyclical indexes for the U.S. and
Connecticut reveals a surprise or two.  In 2001-Q4,
the index for U.S. total employment stood at 99.2,
so jobs nationally were below their trend
levels—not bad for an economy officially in reces-
sion since March 2001, but definitely a recession.
In contrast, the total cyclical index for Connecticut
in 2001-Q4 was 101.8—still above trend though off
a bit from its peak reading of 103.2 in 2001-Q2.
The above-trend index value is picking up the fact
that job totals in the state are 30,000 above trend,
even though Connecticut has lost jobs steadily
since May of last year.
What accounts for the resilience of employment
in the Nutmeg State?  Surprise: Much of the
answer is that we are receiving a boost from two
sectors that historically have suffered most from
recession—construction and manufacturing.  Both
sectors have seen job declines in recent years, and
they are continuing to lose jobs now, during the
recession.  But both are doing better than their
long-term trends.  The cyclical index for manufac-
turing in 2001-Q4 was 108.7, while that for con-
struction was a robust 117.8.  What’s more, the
only two Connecticut sectors below trend in 2000-
Q4 were wholesale trade at 98.9 and—surprise
again—services at 98.1.  For the U.S., by contrast,
every sector except construction and government
has a cyclical index below 100.
This recession, anomalously, has dealt a debili-
tating blow to business services—advertising,
direct mail, temporary help, and computer ser-
vices.  In the 1990s this industry was Connecticut’s
engine of job growth, adding as many as 1,000
jobs per month.  Right now, though, service jobs
are 10,700 below their long-term trend and drop-
ping by 800 per month.  For its part, wholesale
trade, 1,000 below trend and 5,500 below a July
peak is no doubt reeling from an exceptionally
aggressive inventory adjustment process that may
now be nearing an end.
Construction jobs, with a trend decline of 100 a
month, are now falling by 600 per month—but
they’re still 9,600 above trend, reaping the residual
benefits of the rally in retail construction, UConn
2000 building programs, and the ubiquitous casino
expansion projects.  (The gaming boom, incidental-
ly, helps boost the state’s government index
because casino jobs are tallied under that sector’s
employment totals.)  Manufacturing is also holding
up comparatively well.  Though its long-term job
loss rate of 800 per month has accelerated to
1,200, manufacturing jobs are still 20,200 above
trend.  The sector added jobs in the late 1990s as
precision manufacturing flourished.  The state’s
concentration in transportation equipment, with its
long production lead times, has helped steady this
sector in recent days while fueling the state’s
exports besides.  Also, manufacturers that serve
the construction industry—making elevators, cool-
ing systems, and the like—benefit from that indus-
try’s strength.  And though the national weakness
in civilian aviation will assuredly hurt Connecticut
manufacturing down the road, defense-related
manufacturers will likely receive a boost from the
growing Federal military budget. 
Prognosis
Neither construction nor manufacturing will
emerge from this recession unscathed.  But at cur-
rent rates of decline, it would take until April of
next year before construction job totals dropped
below trend, and three years more for the same to
happen to manufacturing, making it unlikely that
either sector will plunge that far during the current
slump.  The relative strength of the goods-produc-
ing sectors perhaps says more about how weak
they already were going into the downturn than it
does about any potential renewed vitality.  But it
may also mean that the worst is finally over for
two beleaguered industries.  We don’t need corre-
lation coefficients to tell us that the economy has
undergone a funda-
mental transforma-
tion from a goods
producing economy
to a services pro-
ducing one.  The
evidence is all
around us.  But the
consequence of
that revolution is
that when a cycli-
cal downswing ulti-
mately does arrive,
it takes the form of
a service-economy
recession.
Compared to the Services, 
Manufacturing is Riding High

In Connecticut’s Service Economy Recession, the Commodity Sector Have Got the Goods

http://cteconomy.uconn.edu/articles/SL_W2002.pdf

In Connecticut’s Service Economy Recession, the Commodity Sector Have Got the Goods

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Research Papers in Economics