Friday, May 27, 2011

Retail Sales in Rhode Island Since the Last Recession

One of the most critical elements that determines Rhode Island's economic momentum is retail sales. Retail sales drives a great deal of economic activity here while itself being determined by how well the overall economy does. Remember, too, that sales tax revenue is an important source of Rhode Island's overall tax revenue.

Retail sales have done better since Rhode Island emerged from its last recession in February of 2010. But, like so many other economic measures, its behavior during this recovery has been choppy at best, reflective of the fact that our state's rate of growth has recently begun to slow.

The best way to analyze retail sales is to take inflation into account. Doing this we obtain real (i.e., inflation-adjusted) retail sales. I have calculated these so that the most recent month of data, April 2011, is the base period (the basis for comparison). The chart below shows real retail sales for Rhode Island since 2007 (click to enlarge).

The most striking feature of the performance of retail sales since 2007 is how far they fell. A quick look at the graph also shows rather disturbing trends not only in their rate of decline but the duration over which their decline occurred. All of this is a testament to how severe the last recession was. It wasn't given the name "The Great Recession" for nothing! From this chart, it should also be fairly easy to grasp one of the reasons why tax revenue here declined during the last recession and has only recovered a bit during this recovery.

During the last recession, real retail sales moved into a downtrend in June of 2007 that lasted for over three years. The "breakout" from this prolonged downtrend, which coincided exactly with the beginning of Rhode Island's current recovery, occurred in February of 2010. 

In more "normal" times (I have forgotten what those actually are by this point), we would have seen a fairly rapid rebound from such a precipitous decline in retail sales. But in those times "leverage" was rampant as credit, whether credit cards or home equity lines of credit, were used without a second thought, banks were very generous in their lending, mediocre credit scores weren't much of an impediment, and collateral was something that persons had to have back in the dark ages. But that was then. The chart above shows now -- not a very substantial recovery in real retail sales. After an initial jump, real retail sales began to fluctuate, largely sideways but trending slightly downwards, meaning that the value of retail sales has barely kept up with inflation. The same has been true for manufacturing wages here (see previous blog post on this). The recent slight downtrend also illustrates that the pace of economic activity in Rhode Island has been slowing of late.

Will real retail sales here break out from the most recent downtrend? Several factors could allow this to occur, namely low interest rates and ongoing national and state recoveries. However, the low and declining interest rates themselves reflect a slowing in the pace of national economic activity. Add budget problems in RI (sorry to be redundant) and for the US, and pension woes that must be addressed, and it becomes apparent that it is largely the underlying cyclical momentum of the US and Rhode Island economies that will largely determine whether a breakout occurs. Should these factors fail, our state faces the prospect of a breakdown below the recent trend, potentially eliminating some or much of the relatively small recovery gains we have experienced over the last year. Should that occur, revenue "surprises" will quickly become disappointments. Let's keep our fingers crossed that this is not what occurs. We already have enough on our state's plate as it is!

Thursday, May 19, 2011

Media Coverage of the March 2011 Current Conditions Index

The March 2011 Current Conditions Index (the report is given in the prior post and on my website) received a great deal of coverage in the local media. Here is my regular monthly discussion of the index on Channel 10's Business Talk with Frank Coletta. GoLocalProv had a very detailed story about my report, and The Providence Business News, as always, gave very nice coverage as well. Finally, I was also on the radio Monday morning with Helen Glover, and Thursday with Tara and Andrew on WPRO.

Current Conditions Index: March 2011

Rhode Island ended the first quarter on a down note. Actually, the entire first quarter qualifies as somewhat of a disappointment, based on the economic momentum we witnessed during the second half of 2010. The Current Conditions Index for March fell to 58, as only seven of twelve indicators improved. While this qualifies as the lowest CCI value for this entire recovery (based on the new labor market data), ironically, it would have tied for the highest value with the pre-revision data. While the March value might seem to indicate overall weakness, it actually does not, as six indicators had exceptionally strong “comps” to beat a year ago, and even in spite of that, two of those improved. Actually, this is fairly common during recoveries, as easy-to-beat values in the early stages of a recession soon disappear, giving way to more difficult “comps.” Further momentum then becomes predicated on beating these ever-stronger “comps.”

There is some basis for disappointment in March, though: it is clear from the CCI’s values that the pace of Rhode Island’s economic momentum has decelerated since the middle of 2010. Part of this has been driven by the adverse effects of higher food and energy prices. Also, our ongoing budget “balancing act” continues to mitigate some of our state’s underlying cyclical momentum. Fortunately, though, we had a margin for error in the first quarter, derived from the fact that our recovery is now thirteen months old.

Particularly noteworthy this month was the performance of the six indicators with very strong “comps” from last year. Four of these failed to improve from a year ago. Single-Unit Permits, which reflects new home construction, fell by 17.2 percent compared to last March. But a year ago, this indicator’s annual growth was almost 58 percent. Clearly, the roller coaster behavior of new home construction here continues. US Consumer Sentiment fell by 8 percent versus last March, but its value last year had risen by just under 30 percent from 2009. There’s a similar story for Employment Service Jobs, which has been our “star” performer throughout this recovery. A year ago, this indicator had risen by 15 percent. Compared to that value, Employment Service Jobs this year was 3.8 percent lower, registering only its first decline in the last sixteen months. And, our Labor Force which had risen by 1.9 percent last March, fell by 0.6 percent this month.

Two indicators with difficult “comps” did manage to improve this month. Retail Sales rose by 1.1 percent this March, in spite of having risen by 3.8 percent one year ago. And New Claims, a leading labor market indicator, fell by 14.3 percent this month on top of a decline of 56.5 percent one year ago.

Private Service-Producing Employment increased by 0.7 percent in March, its twelfth consecutive improvement. Manufacturing was also impressive, as Total Manufacturing Hours rose by 3.2 percent, its tenth improvement in the last eleven months, and the Manufacturing Wage increased by 3.7 percent. Our Unemployment Rate fell again, from 11.8 percent last year to 11 percent, as did Benefit Exhaustions (-18.1%). Government Employment also declined (-1.8%).

Rhode Island’s recovery, now thirteen months old, appears to be losing some of its momentum. CCI values in the first quarter of 2011 are clearly lower than they were in either of the prior two quarters, especially the third quarter of 2010. Headwinds exist, most notably the adverse effects of food and energy prices and balancing our state’s budget. The question for now shifts to how Rhode Island deals with the possibility of a slowing economy.

Tuesday, May 17, 2011

Scrutinizing Economic Forecasts: RI Employment Growth

In the most recent Revenue Estimating Conference, a rather interesting projection of future payroll employment for Rhode Island was made. According to this forecast, not only would Rhode Island's payroll employment rise in the next four years, this projection saw it actually returning to its pre-recession peak by the end of that period. To say that this forecast is optimistic is truly an understatement. Let me explain why this is the case.

First, and foremost, we need to consider how far we are from our pre-recession employment peak. Second, we must take historical growth rates into account to get an idea of what is possible or likely. Finally, as with any forecast, it is necessary to incorporate current and likely future conditions in arriving at a final forecast.

As for the first point, Rhode Island is now slightly more than a year into its current recovery. That recovery is from "The Great Recession." It takes a truly severe recession to merit a name, which is what we had nationally and in Rhode Island. As of March 2011, here's the data for payroll employment in Rhode Island needed to determine this (all data are seasonally adjusted, in thousands):

Pre-Recession Peak:            496.5
March 2011 Employment:     460.2
             Required Increase:                 36.3 (= 7.9%)

So, this forecast requires a four-year employment increase of 7.9 percent. Because growth compounds, that does not mean annual growth is just this figure divided by four. Taking compounding into account, assuming a constant rate of growth over this period, gives a required annual rate of growth of 1.92 percent.

Moving to the second point, what is the historical behavior of growth in Rhode Island? A graph will allow me to convey this information fairly effectively. Below is a chart of annual rates of change in payroll employment for Rhode Island since the end of World War II, starting in 1947 (click to enlarge). I have separated the period when Rhode Island was a manufacturing-based economy (through 1987) and its post-manufacturing period (since 1987).

How likely has it been for Rhode Island to experience job growth just below 2 percent for four consecutive years? In the post-manufacturing era, this occurred only once -- during the tech boom of the late 1990s. Look closely at growth rates for all the other years, especially since 2000. Not very impressive, to say the least. So, this could happen, but it requires that we replicate an extraordinary set of circumstances during a tech boom, the likes of which we haven't seen since. Note also, how Rhode Island's job growth failed to sprung back very sharply from the severe job losses in 1990 and 1991. So much for V-shaped recoveries here!

This brings me to the final point, taking current circumstances into account. At the risk of being redundant, Rhode Island has a string of large budget deficits ahead. Add to this unfunded pension liabilities, financial crises in cities, most notably Providence, which may well run out of money by early fall, a slowing national economy, and our state's labor force which has major  skill deficiencies, and it is apparent that there is a large and growing number of factors that will continue to mitigate the pace of cyclical momentum here. This has been confirmed by the recent performance of my Current Conditions Index, which shows that Rhode Island's economic growth has slowed since the third quarter of 2010. There are several positives as well. Rhode Island is in a recovery that, as of the March data, has extended thirteen months since its beginning in February of 2010. Also, the recent labor market data revisions show that our state's employment picture is better than we were led to believe based on the prior data. Lastly, Rhode Island did institute some structural changes to the cost of doing business here, notably lowering income tax rates. We therefore have some margin for error.

In light of all this information, I can't conceive of any realistic scenario under which this forecast ultimately proves to be accurate. For someone who has been analyzing Rhode Island's economy for longer than I care to say, I generally consider a one percent growth rate for employment here as a "norm," unless other factors intervene. And, if the problems in Providence are anywhere near as severe as I believe them to be, their resolution, either with or without the help of the state, will inevitably slow Rhode Island's rate of growth for several years.


Friday, May 6, 2011

RI Manufacturing Wages During This Recovery

Perhaps the biggest surprise of this recovery for Rhode Island has been the performance of our state's manufacturing sector. While manufacturing employment here has been declining for quite some time, "The Great Recession" seriously reduced the length of the workweek. So, as our manufacturing sector's workweek returns to more "normal" levels, total manufacturing hours worked (an indicator in my Current Conditions Index) has continued to improve. As of March, it has improved for ten of the last eleven months. Frankly, I didn't ever think I would see such positive momentum in total manufacturing hours again, but Rhode Island, like the nation, is seeing substantial strength in manufacturing that has made that sector a leader in this recovery, and the workweek was badly beaten down during the recession.

For quite some time, Rhode Island's average manufacturing wage has been well below the national average, and far below the levels in MA and CT. While our state's average hourly manufacturing wage in current dollars has shown significant increases during this recovery (which I date as beginning in February of 2010 using my Current Conditions Index), the same has not been true when our state's manufacturing wage is adjusted for changes in purchasing power. The chart below shows this all too clearly (click to enlarge):

After very sharp increases in the first few months of this recovery (February through May of 2010), Rhode Island's inflation-adjusted manufacturing wage has been continually falling. This is not a good thing for our state, even though values for the most recent months have been adversely affected by rising food and energy prices. The implications for state income gains are not promising, and this might prove to be yet another weak point as our state moves toward yet another large budget deficit in FY2010.

Today's quiz: When was the last year that Rhode Island manufacturing employment rose?
Answer: 1984.