Friday, November 4, 2011

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?

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