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.