Current Conditions Index Report: October 2011

This is an abbreviated version of the October Current Conditions Index report. For the tables, historical reports, and more information, please visit my web site: http://www.llardaro.com . I made my monthly appearance on Channel 10 this morning. Here is a link to that interview. And, as always, the CCI received excellent coverage in both the Providence Business News and GoLocalProv.com.


The fourth quarter began in much the same way the third quarter ended — with the Current Conditions Index remaining at its neutral value of 50, as only six of the twelve CCI indicators improved in October. More disturbingly, October marked the eighth consecutive month for which the CCI failed to beat its year-earlier value. However, while Rhode Island’s economy might still be “dead in the water,” a favorable tide capable of helping us gain future momentum might be emerging.

Not all neutral CCI values are the same. If you have followed my analysis of Rhode Island’s economy over the years, hopefully you have come to understand that for other than the very best or very worst of times, groups of positive and negative forces are constantly interacting. Whichever of these dominates ultimately determines the overall direction the economy takes. In light of this, you should view October’s CCI reading as indicating that on average, compared to a year ago, Rhode Island’s economy was neither expanding nor contracting. When we look “under the hood” at individual indicator performances and trends, however, not necessarily restricting “comps” to one year ago, a somewhat more optimistic picture emerges: for October, seven CCI indicators were either flat or improved on a monthly basis. And, a number of those point to the likelihood that our ultimate breakout from the neutral range may well be to the upside. Remember, year-over-year improvement ultimately begins with favorable changes on a monthly basis.

So, in spite of a bland overall performance, October’s data reveal possibly building momentum. Key to this is the performance of three variables. Retail Sales rose by 4.7 percent in October, its fourth improvement in the last five months, in spite of the continuing deterioration in US Consumer Sentiment, which fell by 9.9 percent. Sustained improvement in this indicator will be a clear signal that Rhode Island’s economy is improving. Employment Service Jobs, a leading labor market indicator that includes “temps,” rose by 2.5 percent, its first improvement since February. And, while our state’s Unemployment Rate fell to 10.4 percent in October, its monthly decline is more credible than recent decreases, as this occurred with the Labor Force rising for the month (of course it continued to decline on a year-over-year basis). Even Private Service-Producing Employment, which continues to grow more slowly, was not largely offset by further declines in Government Employment (-2.0%) this month. Has Government Employment here bottomed around 60,000? That will remain to be seen.

Among the disappointments were: Total Manufacturing Hours, a mainstay of this recovery, which declined for the first time in almost a year and a half (-1.2%); Single-Unit Permits, which reflects new home construction, and perhaps the most volatile of the CCI indicators, declined by 23.1 percent in October, reflecting the reality that little or no new home construction is taking place in Rhode Island; and New Claims, a leading labor market indicator that indicates layoffs, which rose by 3.2 percent, its fourth consecutive failure to improve. If layoffs have now begun to trend higher, this will offset some future economic momentum and mitigate potential gains from Employment Service Jobs.

Finally, the Manufacturing Wage surged by 17.6 percent in October, on top of increases of 16.3 percent for September, 14.6 percent in August, and “only” 12.7 percent in July, while Benefit Exhaustions improved again but at a slower rate (-5.7%).


The Bottom Line:

While Rhode Island’s economy remains stuck in neutral overall, October’s data contain some basis for believing that things might  begin to improve in the future. The critical indicator to watch is  Retail Sales. Overall, though, we must abide by the most basic rule of data analysis: never make too much out of a single month’s data.    Data revisions, especially for labor, could alter this emerging optimism, as October through December employment values are historically those most likely to be changed through rebenchmarking.

Word Cloud

At this point, I have published a fairly large number of posts. If you want to see the words that have appeared most frequently, below is a word cloud of this blog up to now (click to enlarge).

That Sinking Feeling

If you have been following what I have been saying about the performance of the Rhode Island economy over the last year, you know that things here have been deteriorating. Rhode Island has been in a recovery since February of 2010. Throughout 2010, the pace of economic activity here was substantial (relative, of course, to where we had been in "The Great Recession."). But since March of this year, my Current Conditions Index (CCI) has failed to match or exceed its year-earlier value. This, of course, indicates that the pace of economic activity here has slowed. In fact, based on this recent inability to match or exceed year-earlier values and that the CCI averaged its neutral value of 50 over the third quarter of this year, I characterized Rhode Island's economy as being "dead in the water."

Another way to see visualize this is with a graph of the CCI's values by month over the last three years (click to enlarge). I don't think I need to add much discussion to this chart, a picture like this is worth a thousand words, as the old saying goes.

So, at the present time, 2010 appears to be "the good old days." As we contrast last year with what is occurring now, it seems inevitable to get a sinking feeling.

Current Conditions Index Report: September 2011

This is an abbreviated version of the September Current Conditions Index report. For the tables, historical reports, and more information, please visit my web site: http://www.llardaro.com . I made my monthly appearance on Channel 10 this morning. Here is a link to that interview. And, as always, the CCI received excellent coverage in both the Providence Business News and GoLocalProv.com.


The third quarter ended with a whimper, as the Current Conditions Index for September rose back to its neutral value of 50, as only six of the twelve CCI indicators improved. While that’s hardly cause for celebration, at least September’s CCI was better than the contractionary reading of 42 for August.

For the entire third quarter, the CCI averaged 50 — flat economic activity. Perhaps more disturbing is the fact that September marked the seventh consecutive month for which the CCI failed to meet or exceed its year-earlier value. At this point, I think it is safe to conclude that Rhode Island is no longer near stall speed, the conclusion I reached in last month’s report: we are now pretty much “dead in the water.” Yet in spite of this lack of positive momentum, I remain unconvinced that Rhode Island’s economy has actually entered a period of contraction. In other words, as bad as the data are, I do not believe that Rhode Island has  fallen into a recession at the present time. However, I have now upgraded my assessment of the likelihood that Rhode Island falls into a recession this fiscal year from 50 to 60 percent.

September’s data reveal yet another very weak economic performance. Not only did half of the CCI indicators fail to improve, several of the improving indicators displayed a continued  loss of momentum. Worse yet, two of the improving indicators  should be viewed with  extreme skepticism. First for the bizarre.

The Manufacturing Wage surged by 16.3 percent in September, on top of increases of 14.7 percent in August and 12.7 percent in July. Rhode Island’s Manufacturing Wage had been at levels around a decade behind the US average. At this pace, that gap should be entirely eliminated by the end of this year! Our state’s Unemployment Rate fell to 10.5 percent in September, in spite of declines in both payroll and resident employment. This was in large part due to yet another decline in  our state’s Labor Force. View this jobless change with a rather large “grain of salt.”

Among the remaining indicators that improved, Private Service-Producing Employment, while still growing, continued to grow more slowly, falling below one percent growth this month. Unfortunately, much of the benefit from even this slower change was offset by yet another sharp decline in Government Employment (-2.8%). The questions concerning this indicator are when and at what level will it ultimately stabilize? Total Manufacturing Hours, a mainstay of this recovery was effectively flat in September, rising by 0.02 percent. Still, this indicator has risen, albeit at ever-decreasing rates for fifteen consecutive months. Retail Sales surged by 17.2 percent in September, its third improvement in the last four months, in spite of the continuing deterioration in US Consumer Sentiment, which fell again at a double-digit rate (-12.7%). Finally, Benefit Exhaustions, a reflection of longer-term unemployment, improved again, but at a slower rate (-9.1%).

Among the remaining indicators, Employment Service Jobs, a leading labor market indicator, fell by 2.1 percent in September, although its level may well have bottomed. Single-Unit Permits, which reflects new home construction, declined by 16.7 percent in September, after two months of improvement. Clearly, new home construction here remains at very depressed levels. Finally, New Claims, a leading labor market indicator that indicates layoffs, rose by 29.7 percent, its third consecutive failure to improve. We may well have moved into a period of rising layoffs, a trend that could seriously undermine our future economic momentum.

A Chart of the Future Direction of Rhode Island's Economy

It has been abundantly clear from the performance of my Current Conditions Index over the past several months that Rhode Island's economy has continued to slow. As of the most recent report (August 2011), I reported that Rhode Island is essentially at "stall speed."

To understand what is actually happening at the present time, we need to revisit what occurred during the last recession. As that recession continued, the levels of many key economic indicators became so beaten down that they ultimately couldn't fall much further. So, the seeds for the present recovery began to emerge as our state's economy began to decline at slower and slower rates. I wish I could say that this was related largely to Rhode Island's leaders reinventing our state's economy and eliminating most of the structural weaknesses that continue to haunt us to this day. But, this is Rhode Island. The operating procedure of our state's leaders then, which continues to this day, can be summed up with a single word: Mañana.

Our long recession finally ended and economic growth returned around February of 2010, which is the date I place on the beginning of this recovery. As I have discussed in previous posts, this did not then, nor does it mean now, that we have returned to "normal" activity levels. What actually occurred is that the greatly diminished levels of many key variables eventually became relatively easy to beat. So, we finally began to beat these weak "comps," and we improved from there. Our rate of growth thus became positive, and for the remainder of 2010, Rhode Island's economy performed fairly well, certainly far better than it had in the prior three years!

What we are witnessing now is the "second act" of this play. We were able to handily beat the weak comps throughout 2010, but for this recovery to continue, we have to beat ever-improving comps through time. For this to occur, our rate of economic growth must be sustained or even accelerate, and the breadth of overall economic activity must expand.

As my Current Conditions Index shows, CCI values for 2011 have lagged the corresponding levels for the prior year since March. Thus, our economy's rate of growth has continued to moderate. Given the values for July and August, there is even some question in my mind as to whether there is much growth at all.

An excellent way to see the manifestations of the above discussion is to view Retail Sales for Rhode Island. As I have done on other occasions, I converted this to its real (inflation-adjusted) value, since Retail Sales is in current dollars, and its behavior can be distorted by inflation. The chart below shows this since 2007 (click to enlarge):

The first thing that should jump out at you is how far real Retail Sales today are below their peak in mid-2007. This is not unique to Rhode Island -- the levels of many variables today remain far below what they once were in the "good old days" of leverage and debt accumulation. Focusing on the present recovery (the blue shaded area), real Retail Sales have been largely range bound, displaying lower highs throughout this entire recovery, with a floor (or "support") around the $11.6 billion level.

It is this indicator, Real Retail Sales, that can serve as the proverbial "parakeet in the coal mine" with respect to the future (cyclical) direction of Rhode Island's economy. Based on the way this indicator has behaved throughout this recovery, there will either be a breakout above the red line (resistance) or a breakdown below the green line (support) in the coming months.

A breakout, which is what we should all be hoping for, will indicate that the present recovery is continuing. For this to occur, it will be necessary for employment to continue rising, which at the present time means that it returns to an uptrend. Along with this, tax revenue would continue to provide us with pleasant surprises, helping us moderate budget deficits.

A breakdown, the dreaded outcome, would reflect that our state's economy is unable to sustain its current growth and breadth of activity, meaning that we are headed into a double-dip recession. This would be accompanied by falling employment, increasing unemployment, declining tax revenue, and a rising budget deficit. The actions required to restore budget balance would inevitably further slow the pace of economic activity.

So, the ultimate question is which way is Rhode Island headed? Had our leaders used the past crisis ("The Great Recession") to reinvent our state's economy, making it more competitive with greater exposure to growth-oriented sectors, the most likely outcome for us would have been a breakout above with continued recovery. While a crisis is a terrible thing to waste, the inaction of our state's leaders, guided by their primary leadership principle -- Mañana, means that Rhode Island wasted the opportunity afforded it during the last recession to make meaningful structural changes to our state's economy. We once again find ourselves "flat footed," largely at the mercy of national and global economic momentum.

Ironically, the world has changed -- national economic momentum is largely influenced by global trends, especially what is occurring in Europe. So, even the US is no longer the master of its own fate. The real question for us thus becomes exactly what is it that Rhode Island is the master of?

More Evidence of a Flat Economy

One of the more important indicators of Rhode Island's economic performance is income tax withholding. Part of the reason for its importance is that it is not a survey-based indicator, so we don't have to worry about the possibility of survey error and subsequent revision. Furthermore, income tax withholding is real-time data. But it is not what economists refer to as a "leading economic indicator," which is the best type of indicator to use when attempting to predict the future. To the contrary, income tax withholding is a "lagging indicator" which reflects economic activity in past months.

In using income tax withholding as the basis for attempting to understanding Rhode Island's current economic performance, three things must be taken into account. First, income tax withholding is a nominal value, meaning that it does not take inflation into account. Therefore, inflation can distort this indicator, making its performance appear to be better than it really is. Second, there are seasonal variations in the amount of withholding collected throughout the year. To account for this, it is necessary to perform seasonal adjustment. After both of these adjustments have been made, it is possible to meaningfully compare any particular month to any other month. The result, after both of these corrections have been made, is called seasonally adjusted real income tax withholding. To simplify this and what follows, I will simply refer to it as real withholding. Finally, it is critical to remember that, as stated above, withholding is a lagging economic indicator.

First, let's take a look at income tax withholding using seasonal adjustment, but not adjusting for inflation. The chart below shows this (click to enlarge). Its performance of late looks very impressive. Someone using this chart as the basis for determining how well Rhode Island's economy is performing would almost certainly give a very positive vote -- the line of late is clearly sloping upward with a respectable slope.

Now for a more detailed look -- place the above chart in the context of the longer-term trend in withholding, as shown in the next chart (click to enlarge):

While the recent trend still seems promising, in a longer-term context it is apparent that since 2008, income tax withholding in Rhode Island has remained below its longer-term trend. But can't that just be evidence that this recovery has been relatively slow compared to past recoveries? The answer is yes it can. But since neither of the above charts takes inflation into account, we need to view real income tax withholding before making any final determination on current economic performance based on withholding.

The final chart takes inflation into account, showing real income tax withholding (click to enlarge). I have made the base period the purchasing power of September of 2011 (the most recently available data). Notice how real withholding has failed to break above its recent highs of around $75 million, and that it has remained range bound between $70 and $75 million throughout this entire recovery. I labelled these as "support" and "resistance," respectively, terminology from the technical analysis of markets. So, it is not in any way a stretch to state that during this entire recovery, Rhode Island's real income tax revenue has displayed a flat (horizontal) trend. So, while current dollar income tax withholding has been rising, as the above two charts show, its relatively static real value reflects the fact that current dollar growth has only matched, and failed to exceed, the rate of inflation.

However, that's not necessarily bad news. State budgets are run based on nominal values, and nominal withholding growth appears to be strong up to this point. And therein lies the true caveat: what happens from this time forward?


The answer to this question cannot be adequately determined based solely on the past behavior of any single indicator like income tax withholding, whether nominal or real values are considered. As I have indicated numerous times on this Blog, it is necessary to "hedge" one's bets by using a set of indicators to arrive at a far more educated answer to this question. And that is precisely why I formulated and publish my Current Conditions Index each month (http://www.llardaro.com/current.htm ).

The CCI value for August indicated a contraction value (of 42). If we were to observe a string of several consecutive contraction values, it would then be appropriate to conclude that Rhode Island would indeed have begun a double-dip recession. But we are not there yet. And at this point, I am not willing to make that call.

Current Conditions Index: August 2011

This is an abbreviated version of the August Current Conditions Index report. For the tables, historical reports, and more information, please visit my web site: http://www.llardaro.com . I made my monthly appearance on Channel 10 this morning. Here is a link to that interview. And, as always, the CCI received excellent coverage in both the Providence Business News and GoLocalProv.com , while as of the time I am writing this post, the ProJo has yet to even mention it.

So much for a potentially strong start to the third quarter! While the Current Conditions Index originally registered a jump to 67 in July from 58 in June, updated data caused July’s value to be revised down to 58 based on New Claims, which moved from a slight decrease (improvement) to a small increase. What could possibly be worse? August’s CCI value fell all the way to 42, a contraction range reading, as only five of the twelve CCI indicators improved this month. Note that this contraction reading occurred only three months after the neutral reading (of 50) for May. Taken together, these recent CCI values reaffirm what I have been saying for a while now: Rhode Island’s economy has definitely slowed over the past several months. In fact, the set of 2011 CCI values up to this  point are trending lower, as we are have witnessed lower highs and lower lows. However, this does not indicate that Rhode Island has entered a recession. It is never advisable to make too much of a single month’s data. Were Rhode Island in recession, we would have observed six or more consecutive contraction readings. So, while I continue to believe that there is a 50 percent chance of a recession for Rhode Island this fiscal year, I do not believe we are in a recession at the present time. But the bizarre labor market data for August certainly make this pronouncement considerably more difficult.

It's Not Supposed to Be Like This!

Pardon the fact that I have not posted anything for a while, I switched from Cox Cable to FiOS (ready my post about issues I was having) and had to make all the required changes associated with this. Please note that my web site has now been moved to http://www.llardaro.com .

As sooooo many people here continue to summarize Rhode Island's overall economic performance by the recent behavior of its unemployment rate, the collective grasp of how well our state's economy is actually performing continues to slip farther and farther away from reality. 

Recent gains in payroll employment here, which have at times appeared to defy gravity, seem to contradict any hint of weakness, reinforcing the declining unemployment reflects economic strength view. You might think that these large monthly employment gains have been a potential source of confusion to me, as my Current Conditions Index has continued to show a slowing pace of economic activity in Rhode Island. But as of 2011, I have been following Rhode Island's economy for twenty years. Suffice it to say that along the way I have observed and come to know all too many patterns and data combinations that reflect the idiosyncrasies of Rhode Island's economy.

But one doesn't need all this experience to know that it is always preferable to focus on a set of indicators, not any one single variable, to gain an accurate picture of Rhode Island's economic performance. That, of course, was the basis for my creating the Current Conditions Index. And even for a single indicator like payroll employment, there are often several related measures worthy of observation. 

As I have discussed in prior posts, there are two measures of overall employment for Rhode Island. The first, which I have been alluding to above, is payroll employment, the number of jobs in Rhode Island. The second is resident employment, the number of Rhode Islander residents who are working, irrespective of whether this occurs in or outside of Rhode Island. One major difference between these is the inclusion of self-employed persons in resident employment. And that difference matters a great deal in the early stages of recoveries or at turning points for the economy. 

The chart below shows the recent behavior for both employment measures here (click to enlarge):

Note that the year-over-year rate of growth for resident employment peaked before the end of 2010 and has continued to decline, becoming ever-more negative, as 2011 progressed. For payroll employment there is a very different story: after moving to a positive rate of growth in the beginning of 2011, growth continued to accelerate through June. For July there was a modest slowing in growth, before plummeting to an almost 0% growth rate in August. So, was employment here really rising or falling recently?

RESULT #1: Regarding the recent behavior of payroll employment: POSITIVE MEASUREMENT ERROR COMETH BEFORE THE FALL. 

The dramatic-appearing run up in payroll employment should therefore be viewed as spurious, overstating payroll strength. In August, think of payroll employment figure as a "burp," expelling the measurement error that had accumulated in prior months.

Next, let's link the recent declines in Rhode Island's unemployment rate to changes in employment -- but the employment measure that is in the same survey it is -- the household survey (click to enlarge):

Shouldn't the unemployment rate only fall when employment is rising? While that certainly sounds reasonable and intuitive, it is not necessarily true. First, which measure of employment is this referring to? Second, since the beginning of 2011, Rhode Island's unemployment rate has been declining along with its resident employment. 

RESULT #2: THE UNEMPLOYMENT RATE CAN DECLINE EVEN WHEN RESIDENT EMPLOYMENT IS FALLING.

Obviously, there must be another force at work for this to occur, one that is obviously not intuitive. That force is the behavior of our state's labor force, as the next graph shows (click to enlarge):

Rhode Island's labor force has been declining since early 2011, along with both resident employment and the number of unemployed. The fact that the number of unemployed has been declining, even though resident employment has also been falling, is what lies at the heart of the explanation of this strange seeming combination of changes.

The math of August's numbers can be obtained from the following table (data in thousands) (click to enlarge):

Compared to last August, the number of unemployed Rhode Islanders fell by 7,000. That's the good news. But while this was occurring, Rhode Island's labor force declined by 15,200, and its resident employment dropped by 8,200. The trick to understanding this is knowing how the ultimate change in the unemployment rate is determined: the percentage change in the unemployment rate (-7.8%) is approximately equal to the difference between the percentage changes in the number of unemployed (-10.5%) and the labor force (-2.6%).  To simplify this a bit: even though the number of employed Rhode Island residents declined compared to a year ago, in percentage terms, the fall in the number of unemployed was greater than the decline in the labor force. Also, note that while the fall in resident employment was a fairly large number  (8,200), in percentage terms, this was "only" a fall of 1.6 percent, far smaller than the drop in the number of unemployed.

Let me conclude by moving from the math of these calculations and show that in spite of these percentage changes and the way the unemployment rate is calculated, the August data show that a substantial number of Rhode Island's unemployed dropped out of the labor force, presumably as they were unable to obtain suitable employment. Make no mistake, however, the simultaneous and relatively large drop in resident employment is every bit as troubling as this, as it is reasonable to conclude from this rather rare trend that thousands of self-employed Rhode Islanders also "threw in the towel" on their business enterprises. Either way, this indicates that Rhode Island has entered a period of slower economic growth, which is entirely consistent with the recent behavior of my Current Conditions Index. 

RESULT #3: ALWAYS FOLLOW A SET OF ECONOMIC INDICATORS RATHER THAN A SINGLE ONE.

NEW WEB PAGE ADDRESS

I have moved the location for my web page from http://members.cox.net/lardaro to http://www.llardaro.com.  Please change this in your bookmarks. My full Current Conditions Index reports will be published there each month from this time forward. PDF files of past reports will also be available there.

Current Conditions Index: July 2011

Rhode Island started the third quarter on a mixed note. The good news is that the Current Conditions Index for July rose to 67 from its value of 58 in June. That is the highest CCI reading since February of this year. The bad news is that in spite of this higher reading for July, the CCI once again registered a value below its level one year ago. As of July, the Current Conditions Index has failed to beat its year-earlier value for five consecutive months. So, while Rhode Island’s present recovery is continuing, the rate of improvement in the overall level of economic activity continues to moderate.

Make no mistake about it, though, Rhode Island’s economy continues to grow as it has through all of 2011. This recovery will be eighteen months old in August. As I noted last month, the positive economic momentum this has afforded us will provide us with some margin for error in dealing with whatever weakness lies ahead. “The” question, however, continues to be what will happen nationally — will the US experience a double-dip recession?

In July, the trends in several key indicators continued to deviate from what we will need them to be if growth is to re-accelerate. Our Labor Force has now declined or failed to improve on a year-over-year basis for the last six months. Worse yet, on a monthly basis, the decline extends all the way back to last December. This, of course, casts doubt on the validity of the “signal” provided by recent declines in our Unemployment Rate. At this point, I recommend not attempting to gauge the overall strength of Rhode Island’s economy by the behavior of our state’s Unemployment Rate. Not only is this indicator losing some of its statistical meaningfulness, it is a lagging indicator as well. The number of Employment Service Jobs, a leading labor market indicator that includes “temps,” has fallen for the past five months, although its comp last July was very difficult to beat. Along with this, US Consumer Sentiment fell by another 5.3 percent versus last July. While much of this is related to the total dysfunction of our nation’s legislative branch, its effects are nonetheless spilling over into other elements of economic activity.

Fortunately, not everything is moving toward unfavorable trends. The spectacular and (to me at least) unexpected ongoing strength in our state’s manufacturing sector continued in July. Total Manufacturing Hours (+3.2% in July) has now improved for the last thirteen months. Both employment and hours rose in July. Growth in the Manufacturing Wage went parabolic in July, rising by 12.8 percent compared to a year ago. Clearly, sustaining our state’s recent manufacturing momentum will require continued dollar weakness, which, given federal government dysfunction, is likely to continue. Private Service-Producing Employment rose by 2.2 percent in July, its highest growth rate since October. Sadly, the benefits of this change were offset by another sharp decline inGovernment Employment (-3.0%). 

Retail Sales rose by 1.8 percent in July, its fourth improvement in the last five months. New Claims, a leading labor market indicator that indicates layoffs, fell by only 0.4 percent this month, but that was its seventh consecutive improvement. Single-Unit Permits, which reflects new home construction, rose by 1.4 percent in July, its first improvement in a while, although the number of permits remains extremely low. Finally, Benefit Exhaustions, which measures long-term unemployment, declined by 14.4 percent, sustaining its overall downtrend.

This Week

I always try to make at least one post per week on this Blog. Unfortunately, I have Cox bundle service, so all of my Cox services, most notably the Internet, have been non-existent since last Sunday at 9am. Apparently, I live on "the block that Cox forgot." This whole experience has been like having to deal with the Rhode Island's DMV on the home-base level! I call every morning, talk to Cox's tech support, who after thinking my service had been restored, suddenly "discover" that 20 homes on my street remain without any service. I always get the same: "Hopefully your service will be restored by tonight" response. Yeah, but in the long-run, we're all dead! Thank God I have an iPhone (obviously not with Cox), so I can make calls while my Cox phone service "sleeps." And, I am writing this blog post from Starbucks in Wakefield.

As I have been reflecting on all of this and trying to remain constructive, I am VERY thankful that my home, and all of my street, have power. Those who still don't have power are the ones who are truly suffering.

There are a few things I have been contemplating, given all the time I now have on my hands. First, what if Irene had actually been a hurricane, with sustained winds of 70+ mph? Why did a tropical storm do this much damage throughout this state? I'm not buying the duration of winds argument at this point.

Second, my experience in this instance has fortunately been restricted to dealings with the private sector, where alternatives exist if I am unhappy with my existing service. Were this instead related to one of the roughly half of our state's legislators who run unopposed, I would not have had any option for making a change (unless, of course, that person were to commit a felony). Sadly, while the other half of the legislature has opposition, they often end up being re-elected in spite of relatively few accomplishments or problems voters here might have with them. Rhode Island residents are all too willing to complain, but when it comes time to taking action in terms of voting against an incumbent whom one dislikes, this very seldom occurs. Even worse, very few persons here actually bother to vote, even though they are registered!

Why the dichotomy? People would no doubt respond that with Cox, or any private-sector company for that matter, there is actual money on the line. Actually, there is a far greater cost here than one might realize. Permit me to inject a bit of economics here. The cost of anything potentially consists of two parts, the direct or explicit cost, what we actually pay, and the indirect or implicit cost where time is involved in consuming a good or service. In my situation, even though I can get a credit from Cox for service time lost, this will only offset the explicit portion of total cost. The implicit cost, which is related to lost phone calls, Internet, and television (I missed reports on the disastrous employment report yesterday), involves chunks of time because I have been forced to seek alternative ways of having these services. These implicit costs have now become quite high as I move ever closer to the one-week mark. So, contrary to intuition, receiving a credit does not provide total compensation for the services I have lost, anymore than it reflects the total cost involved.

Let me end by moving once again to the statewide level. If anyone is naive enough to believe that retaining incumbent legislators whom persons don't really support is without cost, guess again. There is both the explicit cost, of being forced to pay higher taxes than we should pay given the quality of public services and leadership here, and the implicit cost of the lost time due to our state's celebrated atmosphere of excessive business regulations, time waiting at places like the DMV (blame the system set up, not the workers for this), and the list goes on and on and on. I'll leave it to you to guess which cost, explicit or implicit here, is larger.

Thoughts on Following the Stock Market

As this is a blog about economics and the Rhode Island economy, it's time for me to discuss some basic economics. As you are no doubt aware, the stock market has been correcting of late and it has become extremely volatile on a day-to-day basis. This has inevitably lead to both panic and confusion for the everyday investor. What should you do? How can you better understand all the things that are going on?

These are very important questions, ones that clearly need to be addressed. In this post, I will make a few recommendations on reading material, and introduce a several concepts that will help you navigate your way through all of this.

First, let me recommend an excellent book that will provide you with a basic framework for following the stock market in general: Fire Your Stock Analyst (2nd edition) by Harry Domash. I suspect this will be the best $20 you spend in a long, long time. It is not one of the all-too-plentiful "how to make $1 million" books. I find those to be totally worthless (except to the authors)! Domash's text will provide you with a foundation you can build on, by providing a meaningful basis for you to begin understanding how stock prices are determined and how they change.

I also recommend that you use some website or brokerage site that will allow you to graph any stock (or ETF or mutual fund) that you own, or are considering purchasing. For stocks that you already own, look at its chart on both a daily and weekly basis (different time frames are important for perspective). If you are also able to generate monthly charts, all the better.

This leads me to a second book recommendation: STIKKI Stock Charts. Yes, the spelling is correct. This book, which costs $12,will open your eyes to another dimension of following the stock market: don't just focus on closing prices. Over a single time period, whether it be a day, a week, or a month, price will vary over a range. Therefore, information is available on not only the closing price, but on the opening price, the high over that period, and the low. STIKKI Stock Charts illustrates this effortlessly, providing you with numerous examples, so that in about an hour, you will see that there is a lot more going on than you had been aware of before.

Beyond these reference books, there is a pair of very simple concepts, frequently discussed in the media, that you need to know and understand. I am referring to support and resistance. What is interesting about all of this, is the fact that market prices are determined by supply and demand. There is nothing mythical in any of this.

SUPPORT: when stock prices fall, they almost never fall to zero. They generally move to a level where people collectively believe they are unlikely to fall much farther. At this lower level, the stock will often become viewed as being reasonably priced, or even a bargain. Once this lower price is reached, buying pressure, or demand, begins to overpower selling pressure, or supply. The result, is that price stops declining and may well begin to increase. This lower-level for price is referred to as support. You should use lows as the basis for determining support.

RESISTANCE: when stock prices rise, they eventually move to a level where the stock is viewed as being pricey, or not likely to rise much in the future. At this higher level, the stock's price is considered overvalued, or too expensive. So, once this higher prices reached, sellers, or supply, begin to overpower buyers, or demand. As a result, price will and it's increase and may well start to decline. This higher price level is called resistance. You should use highs as the basis for resistance.

Both of these concepts are discussed all the time in the media. You need to be aware of what they are, so you know understand what is being discussed.While you might not realize it, these two concepts are the basis for several things that you often see "prognosticated."

The first of these is the notion of "buy low and sell high." Support and resistance provide us with an operational basis for defining "low" and "high" prices. "Buy low "should mean purchasing a stock when its price is at or near the support. This assumes, of course, that support will hold. And that will ultimately depend on factors such as how well the economy is doing, factors specific to an industry or sector, etc. "Sell high" should mean selling a stock when its price gets close to or at resistance, assuming that resistance holds. Whether or not it holds depends on factors similar to those that determine the support.

The one thing I never hear discussed in the media is that you should avoid putting all your money into or pulling all of your money out of the market at one time. Instead, you should scale into or out of investments. And, you can use support and resistance to help you with this. For example, if stock price has been rising and is starting to move closer to resistance, that might be a good time to sell some of your shares and take profit on them, thus scaling out. You can do this in steps, as well. Similarly, if price has been falling, and it is moving closer to support, you might begin to scale into that stock, purchasing a fraction of the total you might want ultimately invested. So, if support doesn't hold, and price drops farther than you originally anticipated, you won't have all your money on the line, only some of it, which should help you cushion losses.

The second notion related to support and resistance details how far stock price is likely to fall or rise. Did you ever wonder where the analysts come up with these numbers? Do they go into the desert for 40 days and 40 nights, or is there some other process at work? While there are different ways this can be done, technical analysis, which I have been discussing here, has a fairly straightforward way of answering this question, one that is almost always the basis for what you hear in the media.

Q: How far is price likely to fall?
Translation: Where is the next level of support?

Q: How far is price likely to rise?
Translation: Where is the next level of resistance?

Let me clarify this a bit by providing a chart of Gold prices over the past three months (click to enlarge), using the open-high-low-close framework (refer to Stikki Stock Charts).

Clearly, gold price has been in a sharp uptrend since early July. The pace of that uptrend went "parabolic" in early August. Looking at the end of the recent upturn, resistance was established over the August 8 - 20 period at around $1,825. Gold price went above resistance (a breakout), but that breakout was not sustainable, so gold price corrected (parabolic price moves mean too far, too fast). How much might gold price decline? First, nobody knows that with perfect certainty. Using this framework, in the near term, look at early August support, $1,725. Should that level not hold, the next support, shown above, is from very early August, $1,675. I'll leave it to you to find the next lower level of support from the chart.

Let me conclude with one other element of technical analysis. Should the price of gold begin to move higher again, and I believe it ultimately will, how high is it likely to go? To answer this, determine resistance levels. Note, interestingly (to me, at least) that PRIOR SUPPORT LEVELS WILL NOW DEFINE RESISTANCE!

Recent Media Appearances

Over the past few weeks I have made a several media appearances and my monthly indicator was covered locally.

On August 8, I was on WPRO radio with Buddy Cianci where I spoke about the stock market's recent volatile behavior. I was also on WHJJ with Helen Glover, where we discussed the US debt downgrade,  and WPRO with Tara and Andrew, where we talked about the progress of Rhode Island's economy.

This week, I released the June Current Conditions Index report (see previous post and my web site). It was given excellent coverage, as has been the case for a while now, in both the Providence Business News and GOLOCALProv.com. On Monday, August 15th, I was interviewed by Bill Rapley of Channel 10 about Rhode Island's economic status and made my monthly appearance the next day on Channel 10 with Mario Hilario this month to present the June Current Conditions Index and its implications for Rhode Island.

Current Conditions Index: June 2011

This post contains most of the June Current Conditions Index report, but it excludes the data table and The Bottom Line. If you would like to see the entire report as well as previous reports (in PDF format), go to my web site.

It looks like déjà vu all over again! Until only a few months ago, using labor market data from the prior rebenchmarking, the Current Conditions Index was apparently stuck between values of 50 and 58, leading me to wonder whether this recovery would continue or if Rhode Island’s economy was about to stall. Then, in February, the new labor market data were released. I was pleasantly surprised to learn that not only had Rhode Island’s economy been in a recovery longer than I had been led to believe, but that the actual levels of economic activity were substantially stronger as well. Now, only a few months after receiving this revised data, Rhode Island finds itself in essentially the same situation we thought it was in prior to the release of the new data.

Clearly, Rhode Island’s economy has slowed since the end of the first quarter of this year. And, based on a revision to Retail Sales data from last month, the CCI fell to its neutral value of 50 during May. Thankfully, it returned back to 58 in June, but during the second quarter, Rhode Island’s rate of growth plateaued, moving us uncomfortably close to reaching stall speed. As of June, the CCI has now failed to exceed its year-earlier value for four consecutive months. At times like this, when our state’s economy is slowing, it is important to keep in mind that Rhode Island is still in a recovery, and that the current recovery is moving closer to the eighteen month mark. So, Rhode Island does have  positive momentum and some margin for error with which to counter whatever weakness lies ahead. The ultimate question, of course, is what happens nationally throughout the remainder of this year.

As I noted in last month’s report, the trends in several indicators have changed in ways that will make it more difficult for our rate of growth to increase. Our Labor Force has now declined or failed to improve for the last five months, making recent declines in our Unemployment Rate somewhat suspect. The number of Employment Service Jobs, a leading labor market indicator that includes “temps,” has fallen for the past four months. Along with all of this has been one particular surprise: strength in our state’s manufacturing sector. Total Manufacturing Hours has now improved for the last twelve months, something I thought I would never see again. And, growth in the Manufacturing Wage growth has accelerated to well over five percent for the past two months. Will the substantial momentum provided by this sector continue? Let’s hope the dollar doesn’t strengthen very much from here. 

Retail Sales rose by 1.4 percent in June after falling in May. Along with this, US Consumer Sentiment fell by 6.4 percent versus last June. It is another indicator whose past momentum appears to be slipping away. New Claims, a leading labor market indicator that reflects layoffs, fell by 7.7 percent this month, its sixth consecutive improvement. Private Service-Producing Employment rose by 1.9 percent in June, sustaining its highest growth rate in over a year. Sadly, the benefits of its change were somewhat offset by public sector employment weakness. Government Employment fell sharply once again, declining by 3.2 percent in June, as budget cuts continued. Our state’s Unemployment Rate declined dramatically once again, from 11.6 percent one year ago to 10.8 percent in June. That fall, however, was not necessarily good news, as our Labor Force fell in part because of unemployed Rhode Islanders dropping out of our Labor Force. Single-Unit Permits, which reflects new home construction, declined by 47.5 percent in June, while Benefit Exhaustions, which reflects long-term unemployment, dropped by almost 35 percent, sustaining its overall downtrend.

The Role of Growth in the Debt Crisis

For the first time since 1917, the US no longer has the highest possible credit rating, AAA. As everyone knows by now, last Friday, shortly after the stock market closed, S&P reduced its rating of US debt to AA+, its second highest ranking, based on a combination of the political wrangling involved with the way the US conducted itself during the debt/deficit deal process, the deal itself (deferred cuts + smoke and mirrors), and the economic prospects for the US moving forward.

Critical to all of this is the likely trajectory of the future debt burden on the US economy, which clearly impacts our ability to afford this debt. But how is debt burden defined? As a basic economic tenet, this is defined in relative terms -- the debt relative to our country's ability to afford it. Our ability to afford it, or ability to pay, is predicted on GDP, the value of final goods and services produced in the US. So, the focus of whether we can afford to pay our debt in the future is defined based on the Debt to GDP Ratio:

Debt to GDP Ratio = National Debt/GDP

This is not unlike what your credit worthiness is evaluated based on if (say) you apply for an auto loan: what percentage of your income (which works like GDP here) will the payments (debt) account for? Generally, if this ratio exceeds 28%, you'll be instructed not to forget to close the door on your way out -- application over! The lower is the relevant ratio, or debt relative to the ability to pay it, the more credit worthy the person or country is deemed to be.

Permit me to digress to an algebraic result at this point: through time, this ratio falls when debt grows more slowly than GDP. In other words, economic growth (the change in GDP) must outpace increases in debt for debt burden to decrease through time. So far, so good. The problem is that things get much more complicated because changes in the rate of growth themselves alter national debt by changing the federal budget.

Consider what happens when the rate of economic growth falls, either during recessions or periods of slowing growth. The way our fiscal system is designed, two critical elements automatically impact the federal budget: progressive income taxation; and entitlement spending for programs such as unemployment insurance or welfare.

1. In a slowing economy or a recession, income tax revenue automatically falls, as there is now less income available to tax (the result of layoffs, reduced hours, etc.).
2. At the same time, more persons qualify for entitlement programs such as unemployment insurance, automatically raising the amount spent by those programs. (FYI: the reason these are called entitlement programs is that the government only sets the criteria for entitlement, not the actual amount spent in any year. That is determined by how well or badly the economy does.)
3. Entitlement spending is countercyclical, meaning that it rises when the level of economic activity falls (such as in recessions), and falls when economic activity improves (in recoveries).

The overall result is that the federal budget either has a smaller surplus (yeah, right!) or a larger deficit when economic activity deteriorates. More importantly, the larger deficit then adds to the national debt. The result is a greater debt to GDP ratio. As this shows, changes in the national debt are necessarily linked to changes in the rate of economic growth.

In light of this, what do governments often attempt to do? Pad the denominator -- overstate likely rates of future economic growth, making the debt appear to be less of a burden than it will actually prove to be. Actually, there is an added bonus to doing this: based on what I outlined above, if the rate of economic growth is overstated, tax revenue will also be overstated ("smoke"), while entitlement spending will be understated ("mirrors"), making the deficit, and thus the change in debt, appear to be smaller than it will eventually turn out to be!


The problem is, you can only get away with this for so long. Eventually, either voters or rating agencies will figure out what's been going on. That's when the party ends!

Of course, there are lots of other fiscal tricks that have been utilized by our government for quite some time now. I won't get into those now, but they often consist of deferring future cuts or revenue changes, assuming that these will definitely occur when assumed. This is essentially what the first round of debt reduction did.

Perhaps had the recent political process dealing with this not been such a fiasco, we might have continued to get away with these practices and gimmicks. While two of the rating agencies did not deem our debt and this process to be problematic, the S&P finally had enough, making the downgrade call. Interestingly, S&P also made mathematical errors in their determination our creditworthiness. Apparently their mind was already made up - they refused to be confused by the facts! They claimed that it was just merely a matter of different assumptions in future years. Obviously, the effects of padding exist in both directions -- symmetrical fudge factors!

Instead of arguing with S&P's decision, I prefer to view it as a very necessary wake-up call to our nation and its leaders. We have to change and to abandon the pervasive use of "smoke and mirrors." Remember, the S&P rating was not only a downgrade, it included a negative outlook as well. So, if the "committee of twelve" does what appears to be likely, more theatrics and gridlock, the US could be downgraded even further by S&P. And, I don't rule out possible downgrades by either or both of the other ratings agencies.

At the top of my holiday wish list is one very prominent wish: that members of the US House of Representatives stop acting like a bunch of spoiled three year olds, and that they finally place the good of our country ahead of their fragile egos. Unfortunately, this is not likely to be the case. As we have now begun the move toward "round two" of the debt ceiling process, the markets yesterday were rather unequivocal -- they tanked today just after hearing the list of persons who will make up the group of twelve that will potentially decide the next round of spending cuts. Unless a miracle occurs, this group will almost certainly end up deadlocked, resulting in mandatory cuts being put into place -- but they only go into effect after the election. Here we go again!

Our State's Jobless Rate is Declining. Is That Good News?

In recent months, Rhode Island's unemployment has been falling. In fact, whenever the monthly labor market numbers are released, the local media focus largely, if not entirely, on the unemployment rate and how it changed. So, based on these recent declines, Rhode Island's economy must be doing noticeably better. Or is it?

First, it is critical that this statistic be viewed in relative, not absolute, terms. While Rhode Island's unemployment rate has fallen from 11.5 percent, its level from August through December of 2010, to 10.8 percent in June of 2011, it remains the third highest in the entire US! So, Rhode Island continues to be known for its beautiful beaches and its very high unemployment rate. Quite a niche, isn't it? Let me also state for the record that I don't believe that our state's jobless rate was constant over that long of a period. The single value for the entire August to December of 2010 period is doubtless the result of a smoothing procedure utilized by the US Department of Labor.

Second, we must not forget to consider the way the unemployment rate itself is calculated. To be counted as unemployed, and therefore part of the monthly statistic, an unemployed person must be unemployed (obviously), physically able to work, and this is the kicker, actively seeking employment. What that last condition indicates is that it is quite possible for the unemployment rate the fall not as the result of higher employment, as most people think has to be the case, but because unemployed persons opt to cease their active job search. In economics, this is known as the "discouraged worker effect." Actually, that's a pretty dumb name, since these people obviously aren't working and they're well beyond being discouraged. So, if an unemployed person stops actively seeking employment, that person is no longer counted as being part of the labor force, and is therefore not counted as being among the "officially" unemployed. In light of all of this, you should always view the unemployment rate and labor force participation together. Has this odd combination of declining labor force and falling unemployment been occurring in Rhode Island lately? A picture is worth a thousand words. The chart below (click to enlarge) shows these two elements in Rhode Island for the last twelve months.

Do you see a pattern here? Actually, how can you miss it? For the entire time that Rhode Island's unemployment rate has been declining (all of 2011), our state' labor force participation rate has been declining as well. Note: the labor force participation rate  (the red line in the chart above) is the percentage of our state's working age population that is in the labor force. Based on the chart above, there is definite evidence consistent with recent declines in our state's unemployment rate being at least partially related to Rhode Island residents dropping out of the labor force (as they stop actively seeking employment). And there can be strange results from the monthly Household Survey (see previous blog post on this). But this doesn't tell the entire story.

Third, there are actually two labor market surveys. The unemployment rate is obtained from the Household Survey. I won't tell you how small the sample size is for Rhode Island. This survey looks at Rhode Island's working age population and does not restrict employment to being exclusively within Rhode Island. So, Rhode Island residents working in other states are included in this survey, as are self-employed individuals. The other labor market survey, the Establishment Survey (and approximations to this by the Current Employment Survey in the short-term), focus exclusively on jobs within Rhode Island. Self-employed individuals, however, are excluded from this survey. So, given these differences, it is not uncommon for the two surveys to give different results, sometimes very different results. In recent months, survey results were noticeably different at times. Fortunately, though, the results for June were more in line with each other. Looking at recent results for this employment survey, job gains since January of this year (compared to a year ago), rose from 4,100 to a high of 9,400 in May, before declining to 8,800 in June. Throughout that time period, job loss fluctuated between 4,100 and 5,100. So, the net change in payroll employment here (what the local media inevitably reports as "new jobs" has actually been in an uptrend since January of this year. For the most recent three months, the net change in employment has been greater than 4,000. Thus, part of the reason for our state's declining unemployment rate over this period has in fact been for the "right" reason - improving employment (also see previous blog post dealing with this).

Finally, the unemployment rate is what economists refer to as a lagging indicator. In other words, its behavior this month to a large extent reflects events and trends that occurred in past months. Embodied within the way the unemployment rate is calculated is the likelihood that when an economy begins to improve, some discouraged workers will begin to actively seek employment once again. When that happens, they are once again counted as being part of the labor force and unemployed. This will often result is an increase in the unemployment rate, not a decrease, as one would normally assume when economic conditions improve. Rhode Island's declining participation rate itself is a net change of persons leaving (discouraged workers) and persons re-entering the labor force once they re-commence active job search.

So, has Rhode Island's economic performance, as summarized by the recent performance of its jobless rate been improving? Yes and no. Unequivocally! To summarize: Rhode Island's unemployment rate has been improving of late, yet it remains among the highest in the US; improvements in our state's jobless rate are not entirely the result of a better employment climate, but at least partially the result of our unemployed dropping out of the labor force.

MY REQUEST TO THE LOCAL MEDIA (an economist's pathetic plea!):
Please stop focusing so much on our state's unemployment rate, it is not a very accurate basis for portraying our state's overall economic performance. You need a much broader basis to do this accurately, such as my Current Conditions Index.

If, however, you opt to continue using the unemployment rate as your primary basis for assessing economic activity here, when you drive home after writing your story, only look in your rear view mirror for guidance the entire time (a practical example of relying on a lagging indicator). Let's see whether or not you make it home in one piece!

A New License Plate for Rhode Island

For quite some time now, I have been thinking of a way for Rhode Island to make some money while better synchronizing its name and designation as the Ocean State with its economic realities and the way things are done here. After great deliberation, I came up with my idea: a new license plate for Rhode Island. Like anything that can generate revenue in this state, a few changes will have to be made -- in this case changing our state's name from Rhode Island and Providence Plantations to something much shorter that reflects our fundamental approach to the statewide fiscal "status quo." Then, using this as "cause," I suggest changing our designation from the Ocean State to something that is the "effect" of the way we do things here. Here's what I came up with (click to enlarge this):

Note that I was able to preserve the wave on the license plate, but I changed its color to red reflecting how Rhode Island is drowning in the debt it has amassed over decades of questionable management.

Media Coverage of the May 2011 Current Conditions Index

The May 2011 Current Conditions Index (the full report is given on my website) received a fair amount of coverage in the local media. Here is my regular monthly discussion of the index on Channel 10's Business Talk with Frank Coletta. The Providence Business News, as always, gave very nice coverage, as did GoLocalProv. 

Current Conditions Index: May 2011

This post contains most of the May Current Conditions report, but it excludes the data table. If  you would like to see the entire report as well as previous reports (in PDF format), go to my web site.

The second quarter hasn’t been all that kind to Rhode Island. For May, the Current Conditions Index remained at 58, its third consecutive month at that value, as only seven of twelve indicators improved relative to their values a year ago. Clearly, Rhode Island’s rate of economic growth has slowed and may well be plateauing. This becomes apparent by comparing CCI values for each month of this year with their corresponding values last year. For March, April, and May, the three months with CCI values of 58, 2011 values have fallen below their 2010 levels. And, unlike what we have seen in the last two months, where more than half of the CCI’s indicators had very difficult “comps” to beat from a year ago, this was true for only four indicators in May.

In addition to this, the trends in several indicators appear to have changed in ways that will make it more difficult for our rate of growth to increase from its current level. The indicators I am referring to are the Labor Force, which has now declined or failed to improve for the last four months, and the number of Employment Service Jobs, a leading labor market indicator that includes “temps,” which has now fallen for the past three months. Finally, there have been several very pleasant surprises, most notably strength in our state’s manufacturing sector, leading the way throughout this recovery. But it appears that the momentum provided by that sector, especially Total Manufacturing Hours, may be fading. It is not clear at this point which indicators will be able to replace our manufacturing-based momentum.

The improving indicators this month were led by manufacturing strength, which has now been true for some time. Total Manufacturing Hours increased by 2.7 percent, its twelfth improvement in the last thirteen months, while the Manufacturing Wage rose by an amazing 6.7 percent, in part reflecting labor skill shortages. Retail Sales rose by 0.9 percent in May (my estimate), in spite of having risen by over 5 percent one year ago. Along with this, US Consumer Sentiment rose by only 0.3 percent versus last May, but this month’s improvement reverses two months of declines. New Claims, a leading labor market indicator that reflects layoffs, fell by 20.7 percent this month, its fifth consecutive improvement. Private Service-Producing Employment rose by 2 percent in May, its most rapid rate of growth in a long time. Unfortunately the benefits of this were somewhat offset by public sector employment weakness. Government Employment fell sharply, declining just under 5 percent in May, as budget cuts continued to exert negative pressure on our economy. Our state’s Unemployment Rate dropped sharply again, from 11.7 percent one year ago to 10.9 percent in May. That, however, was not necessarily good news, as our Labor Force failed to improve for the fourth consecutive month, reflecting what is becoming a disturbing trend of unemployed persons dropping out of the Labor Force, which helps to lower our jobless rate.

Single-Unit Permits, which reflects new home construction, continued its roller coaster performance, declining by 23.9 percent in May, its fifth consecutive double-digit decline, and ninth decrease in the last twelve months. And, as if that’s not bad enough, the actual number of permits for May for the entire state was only 51. Employment Service Jobs, a leading indicator that was once our “star” performer in this recovery, fell by 4.9 percent in May, its third consecutive decline. Finally, Benefit Exhaustions, which reflects long-term unemployment, rose by 5.3 percent in May, although it had a very difficult comp to beat from a year ago (-23.4%).

THE BOTTOM LINE:

In spite of all the trends currently taking place here, it is important to keep in mind that Rhode Island is in an economic recovery. May marked the sixteenth month of this recovery, so we do have substantial cyclical momentum and a “margin for error.” Unfortunately, Rhode Island is also plagued by a host of structural negatives that sap a great deal of its cyclical momentum. What is at issue here should be how rapidly our state’s recovery proceeds from here, not when or whether this recovery might end.

Rhode Island's Surprising Cyclical Strength

Although it still comes as a surprise to many Rhode Islanders, Rhode Island has been in a recovery since February of 2010. As of the time this is being written, we are approaching the one and a half year mark for this recovery.

In a number of blog posts I have spelled out precisely what a recovery means -- not a return to "normal" times, but a period where the overall level of economic activity is rising. The pace of the recovery ultimately determines how long it will take to return to "normal" times or to peak levels from the prior recovery for key indicators.


Over the past four months, employment in Rhode Island has turned in a surprisingly strong performance. On a year-over-year basis, while job loss has remained roughly constant, job gains have clearly accelerated (see blog post on this).  The result is important enough to show the following graph again here (click to enlarge).

As I was preparing monthly data for my next Current Conditions Index release, I came upon something that is also very welcome but unexpected: layoffs in Rhode Island have now fallen below their median level going all the way back to January of 2000. The next chart shows layoffs over this period (click to enlarge):

I used the median for this since the extreme values of layoffs during the last recession would push the mean significantly higher. The median, which is the middle value when all values are arranged in ascending order, will not get "pulled" higher as the mean would, so it is the preferred measure of "central tendency" here.

Three important points need to be made about the indicators reflected in these graphs. First, layoffs (actually New Claims for Unemployment Insurance), which is one of the indicators in my Current Conditions Index, is a leading economic indicator. This means that its changes today signal future movements in the overall level of economic activity. So, declining layoffs signal that Rhode Island's economy has been gaining momentum of late. Second, payroll employment overall, or its components, job gain and job loss, are coincident indicators, meaning that their changes reflect the current performance of the overall economy. From the first chart, the acceleration of job gain relative to job loss confirms what the recent downtrend in layoffs implies, that Rhode Island's overall economic performance is improving. Finally, since Rhode Island has income and sales taxes, improving levels of overall economic activity, which produce higher levels of income, result in added income and sales tax revenue. This is the basis for the recent "surprises" in tax revenue our state has witnessed.

What about the fact that Rhode Island's unemployment rate has remained stuck around 11 percent as these changes in layoffs and job gains have been occurring? While everyone pays a great deal of attention to the unemployment rate, it doesn't always move in lockstep with changes in payroll employment, for several reasons. Among other things, it is derived from a separate labor market survey, the household survey. And, the unemployment rate is a lagging indicator, so its changes now reflect what has occurred in past months. There is also a strange footnote to the way the unemployment rate is calculated: unemployed persons who stop actively seeking work are not counted as being part of the labor force, therefore they are excluded from the monthly unemployment number. The flip side of this is that when an economy improves, and some of the unemployed who had stopped looking for work begin once again to search for employment, they are now counted as part of the labor force, which tends to cause a short-term rise in the unemployment rate. However, recent declines in Rhode Island's jobless rate have largely been the result of our unemployed ceasing job search. So, it is quite possible that Rhode Island's unemployment rate might actually rise before it resumes declines based on the behavior of layoffs and job gains discussed above.

Let me point out a strange element of Rhode Island's current economic climate. Our state's jobless rate was third highest in the nation in May. Yet in spite of having so many unemployed persons here, and such a high unemployment rate, manufacturing wage growth has been very strong. While this signals recent manufacturing strength here, it also reflects the existence of skill shortages. Go figure!

Finally, at the same time Rhode Island's economy has experienced this enhanced cyclical momentum, a substantial number of structural negatives, most notably the lack of skills of our labor force, have offset some or much of this cyclical momentum. That explains why this recovery doesn't necessarily feel all that different from being in a recession.

EPILOGUE: After posting this last evening (7/7), the June payroll employment report for the US came out this morning. The results took everyone (including me) by surprise, as national employment rose by only 18,000, well below prior expectations. It will be very interesting to see the June numbers for Rhode Island when they are released in a few weeks. If they show no employment pause here, I will have to question the last few months of data here. I'll have a lot more to say on this if it actually occurs.