A blog devoted to providing my perspectives on the Rhode Island economy that utilizes discussion, tables, graphs, and hyperlinks to illustrate key points and where I come a lot closer to saying what I really think than what I say to the general media. A DISCLAIMER: Everything in and on this Blog is solely attributable to me and bears no connection whatever to either the University of Rhode Island overall or the URI economics department.
Below is an abbreviated version of the September Current Conditions Index report. The full report (in PDF format) along with tables and historical reports is available on my web site: http://www.llardaro.com . ----------------------------------------------------------
The third quarter ended on a bit of a sour
note. While Rhode Island’s economy remained in a recovery the magnitude of
which almost nobody in this state seems to fully comprehend, the pace of that
recovery tapered off a bit in September following a very strong August. In
fact, over the past six months, Rhode Island’s economy has apparently been
unable to sustain and extend the momentum from months with very strong
performances — these have consistently been followed by months with more
moderate paces. So, while on average,
underlying strength here has been sustained, throughout the past six months a
frustrating pattern has emerged where faster-growth months are followed by
slower growth the next month.
This pattern can either be good news or
bad news as the US faces the dreaded “fiscal cliff” as we move towards December
31. Should our state’s recent “stop and go” pattern of more rapid economic
growth move more consistently toward “go,” we will have a better margin of
error should the US fall off the fiscal cliff. Make no mistake — we too would
quickly be dragged down along with the US. Should the “stop” pattern come to
dominate, obviously we would find our state closer to stall speed even prior to
Either way, the effects of the possibility of the
fiscal cliff have already begun to adversely affect businesses. Uncertainty
surrounding the ultimate outcome has hindered their ability to plan for the
future, resulting in their postponing investments in both physical capacity and
hiring. Resolution of the fiscal cliff will also involve fiscal policy lags, so
the ultimate impact of the changes that emerge will occur throughout the first
half of 2013.
For September, six of the twelve CCI
indicators showed improvement, giving a monthly CCI value of 50 using the
“official” data that we know is flawed. Based on my simulations, the more
correct CCI value for September is 58. In spite of the CCI’s decline from
August, there is still positive momentum occurring. Of the five
non-survey-based indicators, those that don’t suffer from the flaws currently
plaguing the “official” labor market data, three showed improvement in
September versus five last month. However, one of those indicators, Retail
Sales, had a very difficult “comp” to beat from a year ago, so its decline
this month should not be construed as a
reflection of weakness.
So, what do we actually know about
Rhode Island’s September economic
performance? Rhode Island’s recovery is now 31 months old. Looking at the
non-survey based indicators, even though Retail Sales fell by
2.4 percent in September, it remains surprisingly strong, having risen for ten
of the past twelve months. US Consumer Sentiment once again surged by over 30
percent, helped by recent stock market momentum and actions by the Fed. --------------------------------------- See the full report at: http://www.llardaro.com .
Below is an abbreviated version of the August Current Conditions Index report. The full report (in PDF format) along with tables and historical reports is available on my web site: http://www.llardaro.com .
Up until last month, it appeared that
Rhode Island’s economy had already seen the long awaited acceleration in
activity come and go. Clearly, we improved at the end of 2011, which provided
us with momentum through the first quarter of 2012. Then, this economic momentum began to slow, placing us
in the situation with higher levels of many indicators, but their overall rate of growth was decelerating, a
possibility that could potentially move our state’s economy to stall speed at
some point in the future. But the August results show some real strength and
quite possibly a re-acceleration in Rhode Island’s economic momentum moving
forward. So, any discussion of the potential for reaching “stall speed” should
be put on the backburner at this point.
For August, eight of the twelve CCI
indicators showed improvement, giving a monthly CCI value of 67 using the
“official” data that we know is flawed. Based on my simulations, the more
correct CCI value for August is 75 (or possibly 83, but that’s too close a call).
What I find most encouraging for August is the fact that all of the non-survey
based indicators, which don’t suffer from the flaws currently plaguing most of
the labor market data, showed significant improvement, something that doesn’t
occur very often enough here.
Ironically, the “official” labor market
data continue to show an economy that fell off a cliff about a year ago, with
payroll employment now declining on a year-over-year basis for twelve of the
last thirteen months. Let me renew my challenge to anyone using that data to
conclude anything other than the existence of a double-dip recession here.
Ironically, though, the “official” labor market data, which typically become
more negative starting around this time of year are becoming less so, indicating
that the measurement error might now have changed direction. Go figure!
So, the potential
re-acceleration reflected in the August data may be showing that Rhode Island’s
economy is gaining some momentum just as the US economy is. For both, this is
occurring as Europe remains mired in recession and Asian growth has slowed.
Monetary policy lags (6-12 months) preclude recent monetary changes by the Fed
and ECB from directly causing this momentum, other than positively influencing
confidence and investor appetite for risk. -------------------------------------------- See the full report at: http://www.llardaro.com .
Below is an abbreviated version of the July Current Conditions Index report. The full report (in PDF format) along with tables and historical reports is available on my web site: http://www.llardaro.com .
Rhode Island began the third quarter with
both good news and bad news. The good news is that its economy actually
accelerated at the end of 2011 into mid-2012. While the “official” labor market
data continue to show an economy that has fallen off a cliff (I challenge
anyone using that data to conclude anything other than RI has entered into a
double-dip recession), reality has been very different! The bad news is twofold:
first, almost nobody in this state realizes that such improvement in levels and
acceleration in the pace of activity occurred (unless they have been following
this index and my Blog); second, it is now very clear that the pace of activity
Rhode Island attained earlier this year has now moderated significantly. Both
the CCI values based on the “official” data (the upper value) and my estimation
of the actual numbers (the lower number) show that Rhode Island’s economy has
shifted into a lower gear: the “official” number for July fell to 50 while my
estimated value declined to barely expanding, at 58.
So, the question now shifts to
which indicators will take the proverbial baton and lead any future
improvements? While the US economy has slowed, both the Federal Reserve and the
European Central Bank have taken strong steps to avoid significant downturns in
economic activity during the coming months. One outcome of this, a weakening US
Dollar, should help to moderate and hopefully offset some of the recent
weakness in our state’s manufacturing sector as exports benefit. Unfortunately,
there is a rather long lag before dollar depreciation normally translates into
significant improvement in US (and Rhode Island) manufacturing.
In light of all of this, what do we
actually know about Rhode Island’s current economic performance? As of July,
Rhode Island’s tepid recovery that began in February of 2010, now 29 months
old, continues to lose momentum, most notably in the areas of manufacturing and
retail. For July, Retail Sales fell (by 1.6%), its first decline since last August, following real
strength over every month prior to July of this year. Total
Manufacturing Hours barely rose in July (+0.1%), as the workweek declined. Of course, we
are told that our Manufacturing Wage is still growing at what is likely the most rapid rate on earth
In spite of this, things here are now and
will remain significantly better than what the “official” data show, especially
since the flawed “official” data can be expected to begin showing ever-larger
employment declines for the rest of this year. Even for July, we were told that
payroll employment fell by an eye-opening 7,300 compared to a year ago. A more
accurate reading can be obtained by reversing the sign of the “official”
payroll change — overall employment is likely around 7,000 higher than what the
“official” data show.
I have posted a table with data on a large number of economic variables -- most of which are based on the flawed "official" data for Rhode Island over the past twelve months: http://www.llardaro.com/current_performance.htm . As horrible as the labor market data are, remember these will all be revised higher eventually, so things here are not as bad as the data make things appear.
Early next week I will be releasing the July report for my Current Conditions Index. Stay tuned!
Below is an abbreviated version of the June Current Conditions Index report. The full report (in PDF format) along with tables and historical reports is available on my web site: http://www.llardaro.com .
Rhode Island ended the second quarter on a rather mixed
note. While the “official” labor market data continue to depict an economy that
is not only falling off the proverbial “cliff,” but that has entered into a
double-dip recession, a news release from the Governor’s office, based on
analysis from the Department of Labor and Training, stated that employment here
is not actually falling, as the DLT monthly data continue to show, but has
actually been increasing for some time now (the release covered the first
quarter of 2012). Apparently, this came as a big surprise to much of this
state’s media, even though the errors with the “official” labor market data
were publicly acknowledged by the DLT months ago and I have been discussing
all of this regularly in my Current Conditions Index reports. Recall, this data
divergence caused me to begin providing two CCI values each month — one based
on the “official” data and the other using my simulated labor market
What do we actually know overall about Rhode Island’s
current economic performance? Rhode Island’s economy continues to be in a tepid
recovery that began in February of 2010, now 28 months old. While economic
reality here is far better than what the “official” data show, the non-flawed
data indicate that this recovery displayed some loss of momentum during the
second quarter that will likely continue moving forward. It is important to
note, however, that even using the flawed “official” labor market data, the
Current Conditions Index never gave a recession signal. Furthermore, based on
my simulations (the other CCI values listed), Rhode Island’s economy has been
able to sustain some of the momentum it gained during the second half of 2011,
although this that momentum bas begun to erode based on the performances of
several key individual indicators.
According to my econometric models, there were three
noteworthy but problematic indicator changes in June. First, payroll
employment, which has been rising for some time now on a yearly basis (albeit at
declining rates) actually declined. Second, this employment weakness translated
into an uptick in Rhode Island’s monthly Unemployment Rate from my
projection of a 10.7 percent rate in May to 10.8 percent in June. Finally, the
rate of growth in a very important labor market indicator, Private
Service-Producing Employment, has slowed dramatically over the past two
months, barely increasing in June.
For several months now, I've been pretty much alone noting how payroll employment in Rhode Island would be revised substantially higher, both in my Current Conditions Index reports and prior Blog entries. Over this period, I have continually stated how employment here is behaving very differently than what the official data were showing. The basis for this dates back to a number of months ago when the Rhode Island Department of Labor and Training (DLT) stated at the most recent Revenue Estimating Conference that employment as of the end of 2011 had not been declining, but actually rising. Based on this, I dusted off my econometric models and began generating projections of what I believe payroll employment would ultimately be revised to.
This was a very lonely endeavor, as I appear to have been the only person in this state noting that the official data were incorrect and far too pessimistic. So, while everyone continued to say that Rhode Island was on the verge of a recession, something I too had said until I learned of the possible revisions, I tried in vein to note that this was very far off the mark. And, even if we were to eventually fall to a double-dip recession, presumably based on global weakness or national weakness, at least we would have some margin for error.
Today, the DLT and Governor Chafee released a report confirming substantial future upward revisions to our state's payroll employment data. According to this press release:
"A recent analysis of tax data shows
that Rhode Island
job growth exceeded original estimates for the first quarter of 2012, according
to the RI Department of Labor and Training ... The new estimate for Rhode
Island-based jobs as of March 2012 is 464,700 jobs, up 7,000 from earlier
numbers reported in April. The earlier estimate indicated that Rhode
Island-based jobs had dropped over a year's time by 2,200. However, the new
estimate shows that Rhode Island-based jobs had likely increased by 4,800 from
March 2011 to March 2012."
This is consistent with what my econometric models had been showing. Ironically, my estimates were a bit too low, as they showed a clear uptrend since October of last year, but to a level below the apparent upward revision. The chart below (click to enlarge) shows the "official" data and my estimates.
Based on this, let me reiterate a few points I have been making over the past several months:
Rhode Island is not on the verge of a double-dip recession;
Our state's unemployment rate is not the currently-published 10.9%, but lower, based on the higher payroll employment numbers. My models project a 10.7% rate as of May; and
As good as these results are, my models agree with the existing data that Rhode Island's labor force has been, and continues to, decline.
So, at this point, let me take the leaders of our state and its media to task for being far too pessimistic about the state of Rhode Island's economy. Think about that for a moment: me, Leonard Lardaro, accusing our leaders and the state's media for being too negative! Ain't that a bitch!!
Let me conclude by stating something that this points to, which I have been saying for far longer than I can remember: Accuracy is far more important than tone!
This is an abbreviated version of the full Current Conditions Index report for May. The complete version, which includes the indicator performance table and the report in PDF format, can be found on my web site: http://www.llardaro.com .
Rhode Island’s economic outlook in May is similar to that
from April: the current tepid recovery is continuing, although signs of a loss
of momentum have become more readily apparent. The good news is that Rhode
Island is still in the recovery that began in February of 2010, which as of May
reached its 27th month. The concerning news is that like the US, our rate of
improvement has slowed.
In discussing this, I am not referring to the questionable
“official” labor market data currently being released by the DLT. According to
those figures, payroll employment here has now either declined or remained
unchanged on a year-over-year basis for ten consecutive months. I challenge
anyone who chooses to believe those numbers to reach any conclusion other than
that Rhode Island has already entered a double-dip recession. In fact, even the
DLT has admitted publicly that a number of those published year-over-year
employment declines never occurred — they will be eliminated when the data are
revised in coming months.
Fortunately, if we focus on more accurate data and the
Current Conditions Index, which is a broadly based index, it is clear that some
of the momentum we witnessed as 2011 ended and we moved into 2012 has begun to
fade. While the pace of economic activity here isn’t all that great, my
econometric models show that payroll employment has slowed to an annual growth
rate of around 0.3 percent. The Current Conditions Index for May, based on the
“official” data, shows a reading of 58, once again in the expansion range. The other
displayed value, 67, is the likely value when the “official” data are
eventually revised. Based on those alternate values, the CCI has now moved from values
around 75 down to 67. As I have noted for several months now, it is the persistence of these
expansion range CCI values that matters the most for now.
On a year-over-year basis, four of
the five non-survey-based CCI indicators improved. Only three of the five
showed improvement on a monthly basis, though. Retail
Sales surged by 9.9 percent compared to last May, its ninth consecutive
improvement. To some extent this is weather related. The skilled Rhode
Islanders we rent out to neighboring states who bring their income home with
them also directly impacts this indicator. Overall, such substantial Retail
Sales momentum argues against making any recession call. ......
The remainder of this report and the complete version, which includes the indicator performance table and the report in PDF format, can be found on my web site: http://www.llardaro.com .
Over the last six years, total government employment in Rhode Island appears to have fallen a great deal -- probably more than most of us might have thought possible at one time. Obviously, all of the budget cutting that has occurred since 2006 has played a role in this. One might also think that the recession itself would also have had a large negative impact. However, the stimulus plans from the past few years actually helped Rhode Island and many other states avoid state employee layoffs, although this type of help appears to have now ended.
Let's take a look at government employment in Rhode Island, which consists of federal, state, and local government employment. The chart below shows this going all the way back to 1990 (click to enlarge).
Total government employment peaked here in March of 2006 at 66,900. Over the next six years, through March of 2012, it declined to "only" 59,800, which was a 10.6 percent drop. Do we conclude from this that our state's public sector has truly contracted more than it should have and that no further declines should occur? Hardly. The chart above looks at government employment in absolute terms, independent of anything else. For those of you who have read many of my posts, this is not the correct way to approach this -- a relative view is more appropriate.
Our relative view is accomplished by looking at government employment relative to overall (payroll) employment. This is shown in the next chart (click to enlarge) that covers the same time period as the original chart.
Several things should jump out from this chart. The most obvious feature is the longer-term (secular) downtrend in government's share of payroll employment in Rhode Island. To help explain this to persons who might find this chart confusing, let me point out that government's share declines when it falls relative to overall employment. This does not necessarily mean that government employment, or for that matter, payroll employment, is declining. During periods of economic growth, this indicates that government employment grew less rapidly than did payroll employment.
The second significant feature is that starting in November of 2007, one month before our state's employment peak, government's employment share began rising, as it would through May of 2010, from a 13 percent to 13.8 percent of payroll employment. This reflects the fact that over this period, government employment was declining by less than did payroll employment. While this uptrend lasted for three years, government's share of payroll employment eventually began to decline once again as it now has for the past two years.
The final noteworthy element of this chart is that in spite of the decline in government's share over the past two years, government's share has remained above the levels consistent with its secular downtrend. This is reflected in the way the line for government's share has stayed above the dashed gold line reflecting the secular trend. So, while it might appear that a valid conclusion from the first chart is that Rhode Island's government employment may well have contracted enough, or perhaps too much, this is less obvious when viewed in the more proper context of government employment in the setting relative to overall employment.
To help better comprehend what underlies these charts, the next chart disaggregates the information contained in the second chart, looking at the shares of each of the three components of total government employment (click to enlarge).
Since 1990, state government employment's share has fallen noticeably, from 5 percent of payroll employment in the early 1990s to 3.5 percent at present. As this was occurring, federal government employment's share has remained virtually unchanged, starting at 2.4 percent in 1990 and falling only slightly to 2.2 percent at present. Clearly, local government employment's share rose from 6.6 percent in 1990 to its peak of 8 percent in March of 2006. At present, local government employment's share remains at 7.4 percent of payroll employment. That is highly significant, since local government employment is by far the largest component of total government employment in Rhode Island, exceeding the sum of the two other components. Within local government employment, local education employment comprises approximately two-thirds of its total.
Overall, as of May 2012, local education employment, the largest sub-component of total government employment in Rhode Island, was 22,800, or 2.8 percent of service-producing employment. While we might not be able to reduce that number very much through educational reform and other changes, the cost of financing K-12 education in this state is very high -- among the highest in the country on a per-pupil basis. Sadly, the "output" resulting from this very high expenditure is less than satisfactory. This points to relatively low productivity, if one were to relate attainment to expenditure. However, this is a very complicated issue. Suffice it to say for now that managing government here, as should be obvious from the situation for local educational employment and expenditure, is far more of a quality issue than one of just quantity.
This is an article I wrote several weeks ago that the ProJo chose not to publish in its printed edition.
I've always admired weather forecasters. Whenever they want
to know precisely what the current conditions are, all they have to do is look
out the window. Things aren't quite that simple for economists. A great deal of
the data we use is survey based. And, predictably, survey data are often
revised, occasionally in ways that tell a very different story than what the
originally released data showed.
This is the case Rhode Island right now. After my March Current
Conditions Index report release, which showed that based on the existing data
Rhode Island was flirting with the double-dip recession, I was informed by the
Rhode Island Department of Labor and Training (DLT) that the likely upcoming
revisions to their data will tell a strikingly different story. Instead of
seven or eight months of consecutively declining employment, the upcoming data revisions
apparently show that employment actually rose throughout that time period. What
they did not say, but that is every bit as important, is that if employment has
actually been rising, a number of other key indicators will also be affected,
not the least of which is our state's unemployment rate.
Some of this was apparently discussed at the recent Revenue Estimating
Conference and reported by the local media. However, with the release of the
April labor market data, we only heard about the existing labor market data,
which we now know is faulty. Whenever anyone turned on their television or read
the local newspapers, they were told that Rhode Island's unemployment rate rose
to 11.2 percent as employment fell yet again.
What an extraordinary time! I honestly can't remember ever
being informed this close to the most recent rebenchmarking (data revisions) that
such dramatic changes were coming. This placed the local media in quite a
predicament, as they chose to report the April data as released by the DLT even
though, as I pointed out to a number of them, we shouldn't put very much confidence
in that data or the obvious conclusions that emerge from analyzing it.
So, at this point it is appropriate to quote the character Emily
Litella of Saturday Night Live fame concerning Rhode Island’s large number of
employment declines and the increase in our unemployment rate above 11 percent:
The origin of the situation we now find ourselves in is the
result of cost cutting at the US Bureau of Labor Statistics (BLS). Soon, it
will be taking over the task of producing the monthly employment numbers that
was historically done by our DLT (this is also true for all other states).
While this may well lower costs, its greatest cost to the people of Rhode
Island will be the loss of all the experience and expertise of our DLT
possesses. Furthermore, the way the BLS will produce their estimated labor
market values will not incorporate as much known data as the DLT has in the
past. Instead of beginning projections after the third quarter of the prior
year, the BLS will start after the second quarter. Furthermore, and more
troubling, Rhode Island will apparently be homogenized. By this I mean that
exceptional circumstances or events that would routinely be analyzed and
meaningfully incorporated into the labor market data by our DLT will now often be
ignored by the BLS. As Rhode Island has an extremely idiosyncratic economy,
this homogenization will make our state’s labor market performance appear to be
very different from what it actually is at times. Ironically, the most obvious
impact of this homogenization will be to make Rhode Island appear to more closely
resemble overall US economy. If you don’t believe that, take one look at what
the BLS has done with their estimation of our state’s manufacturing wage (especially look at the charts after Read More ...)!
Because of these extraordinary circumstances, I found it
necessary to build a small econometric model of Rhode Island’s labor market in
order to estimate and simulate various labor market indicators. According to my
model, payroll employment has not been consecutively declining, as the existing
data show, but is in a mild uptrend. At the Revenue Estimating Conference, the
DLT offered tentative projections of where they believed payroll employment
might be as of March. My model produces slightly more optimistic numbers. As of
April, my estimate of payroll employment is slightly above 462,000, which is
higher than the official April value of around 458,000. Instead of having eight
consecutive employment declines in the last nine months, as indicated by the
current DLT data, my model shows consecutive increases for seven of the past
eight months, although not necessarily by large amounts. Along with this, my
estimate of the April unemployment rate shows it declining to 10.7 percent, not
rising to 11.2 percent. Even though my estimated jobless rate may appear to be
“better” than the DLT’s official value, its foundations are less than
flattering -- it is accompanied by declines in both our labor force and
The current divergences in labor market data are not the
fault of our state’s DLT, but the result of something forced upon them by the
federal government -- a different methodology. While I continue to have the
utmost faith in our state’s DLT, I am very irritated by the apparent attempt to
politicize our state’s jobless numbers by the DLT’s spokesperson, Laura Hart. She
recently offered an utterly ridiculous explanation as to why our state’s jobless
rate is so high -- Rhode Island doesn’t have the economies of scale that states
like Massachusetts have. If her hypothesis were correct, Delaware, another
small state, would have a very high jobless rate, while California, an
extremely large state, would have a very low jobless rate. For April, Delaware
had a 6.8 percent jobless rate while that for California was 10.9 percent.
It’s bad enough that the diverging data exists. Having DLT’s
spokesperson offer such ad hoc rationalizations only makes things worse.
This is an abbreviated version of my Current Conditions Index report for April (it excludes tables and The Bottom Line). I you want to read the full version, please go to my web site: http://www.llardaro.com .
Analyzing and forecasting an economy has
always been part science and part art. In light of the situation Rhode Island
currently finds itself in, based on the likelihood that the “official” labor
market data for this state is inaccurate, I guess you can add navigating
through fact versus fiction to the above list.
Since existing labor market data
are very likely understating two CCI indicators, Private Service Producing Employment and Employment
Service Jobs, and overstating one other, the Unemployment Rate, I will
now be providing two CCI estimates each month as the likely range for the CCI. This will
continue until the flawed data disappears, hopefully next February.
So, in spite of what you continue to hear
in this state, payroll employment has not fallen for eight consecutive months.
Nor is Rhode Island close to a double-dip recession. Interestingly, though,
with that many alleged consecutive drops in employment, why haven’t those
analysts who believe the currently released labor market data actually made the
recession call? I had avoided doing that prior to the revelation of the flawed
labor market data, since the Current Conditions Index failed then, as it
continues now, to show the requisite signal for a recession: six or more
consecutive values in the contraction range of below 50.
With all of this in mind, Rhode Island
entered the second quarter of 2012 on a positive note, as its re-acceleration
from the mid-2011 doldrums continued. In spite of the fact that Current
Conditions Index values based on the faulty existing labor market data (upper values) continue
to show readings barely above stall speed, allowing for likely data revisions,
the CCI has moved into the range of 67—75 throughout this entire year. This
should not be construed as indicating that this recent acceleration is
particularly rapid. Rhode Island continues to find itself in a sluggish
recovery. It is the persistence of these higher CCI values that matters the most for now. We have
moved above stall speed. As of April, Rhode Island’s recovery reached its 26th
On a year-over-year basis, four of the five
non-survey-based CCI indicators improved. Only three of the five showed
improvement on a monthly basis, though — something for us to keep an eye on. Retail
Sales increased by 1.6 percent, its eighth consecutive improvement compared
to year-earlier values. Part of this is no doubt related to the skilled Rhode
Islanders we rent out to neighboring states who bring their income home with
them from states whose jobless rates we can only fantasize about here. Clearly,
though, Retail Sales momentum is continuing. Along with this, US
Consumer Sentiment rose as well, by 9.2 percent. For both of these indicators, April
values exceeded their March levels. New home construction, based on Single-Unit
Permits, continued its roller coaster ride, rising by 7.5 percent in April
relative to last year. It too rose relative to March. New Claims for
Unemployment Insurance, a leading labor market indicator that reflects layoffs,
declined by 8.8 percent, its fifth improvement in the last six months. Finally,
Benefit Exhaustions, reflective of longer-term
unemployment, failed to improve for the first time in almost a year.
Today, the May labor market data for the US were released. The stock market tanked, continuing a strong downtrend that has persisted for a few weeks now. How can you make sense of what is happening now or what might occur in the future? First, let me recommend a very well written and readable book about following the stock market: Fire Your Stock Analyst (2nd ed.) by Harry Domash. I also have a link on my web page with numerous references about the the stock market: http://www.llardaro.com/references_for_exploring_stocks.htm .
To start with, let me outline an important principle about the stock market's performance:
Principle #1: Over the long term, the primary determinant of stock price movements is the expectation of future profits.
Of course, in the short-term, emotion and a host of other factors may dominate stock price movements. I don't recommend that you attempt to anticipate very short-term movements.
You are no doubt already aware of the fact that in a global economy, the performance of US corporations is not immune to events overseas, since many US corporations receive a substantial portion of their revenues and profits from overseas operations. Thus, the macro performances of Europe and Asia have a major bearing on what will likely happen to future US corporate profits. We know that Europe is now in a recession and Asian growth has slowed. Add to this a very disappointing US employment report for May, and there have been lots of negatives already factored into profit expectations, which have been much of the driving force behind the recent stock market declines.
The real question, though, is what will happen to growth and profit from here? This brings me to a second principle:
Principle #2: Because the expectation of future profits tends to be the driving force underlying stock market prices, stock price changes tend to occur before (lead) changes that will ultimately occur in the overall economy. Based on this, the stock market is called a leading economic indicator.
The recent decline in the stock market therefore indicates the expectation that the rate of growth of the US economy will slow further in the coming months. One should be careful not to make too much of this, however, since, as the old saying goes, "The stock market has predicted eleven of the last six recessions." Indeed, the stock market tends to do a better job of predicting upticks in economic activity than downturns. So, I do NOT recommend that you use the stock market's behavior as the basis for predicting if a recession is coming.
Since we now live in a truly global economy, to truly understand what is happening in the stock market, or what may occur in the future, it is necessary to look beyond stocks.
Principle #3: Different types of markets are linked (interrelated), so that clues for future changes in the stock market can often be gleaned by observing what is happening in those other markets. This is called intermarket analysis. You should follow at least the stock market, the bond market (for interest rates), and commodity prices. Currency markets also matter as well.
The stock, bond, and currency markets are all leading economic indicators. Commodity prices, however, tend to lag. I will focus on the bond market here.
Interest rates are determined in the bond market. Bonds, if you are not up on these, are debt obligations. The entity issuing the bond (ex: government, corporation, etc.) wishes to borrow money for some purpose. So they issue bonds, which in exchange for the money they receive from the bond investor, pay a fixed amount of nominal income over their term. There is a bond value, let's say $1,000, a stated interest rate, say 3%, and a term until the bond matures, lets assume 10 years. So, for when this bond is newly issued, you pay the $1,000. In return you receive a fixed income stream of $30 per year (the stated interest rate times the bond value = .03x$1,000) every year until the bond matures, then you receive the $1,000 back when the bond matures. Because bonds pay fixed amounts of income, these are called fixed income assets. Furthermore, the income is a nominal value. So, the greatest threat to bond holders is inflation, which lowers the real, or inflation-adjusted value, of the bond's fixed income.
Principle #4: Anything that raises actual or expected inflation makes bonds less attractive, since their fixed income then has a lower real (i.e., inflation adjusted) value.
As bonds are often sold before they mature (in secondary markets), higher expected inflation leads to some combination of lower bond demand (fewer buyers), and greater supply as some bondholders wish to unload their existing bonds. Both cause bond prices to fall in what is called a bond market sell-off.
The interesting thing concerns what causes expected inflation to rise. Generally, this is the expectation of more rapid economic growth.
Principle #5: Good economic news, which signals the likelihood of more rapid future growth, leads to higher expected inflation, which results in a bond market sell-off and lower bond prices.
Principle #51/2: Bad economic news, like the discouraging employment report today, signals the likelihood of slower future growth, which lowers expected future inflation, causing a bond market rally and higher bond prices.
These principles take a while to get used to: bonds tend to do well with bad economic news and the prospects for a weak economy. For this reason, bonds are referred to as a recession hedge.
Principle #6: When bad economic news occurs and expected growth falls (like today), the stock market sells off (due to lower expected future profits) while the bond market rallies (based on the expectation of higher real income from holding bonds). Money thus moves from stocks to bonds. This is called a flight to safety.
The stock market weakness over the past several weeks has therefore been a flight to safety. You are no doubt aware that the stock market has been declining. And, I will guess, you probably think there is no way to make money when the stock market is declining. WRONG!!! The bond market has been rallying.
Below is a chart of stock prices (the Dow-Jones Industrial Average) and bond prices (the 10-year US Government Bond Price) which illustrates what a flight to safety has looked like (click to enlarge).
Let me conclude by noting a principle I use all the time: which market changed direction first? Both stocks and bonds are leading economic indicators, but bonds have a longer lead time. In the next installment, I will discuss how to use changes in interest rates to help predict future stock price changes.
This is an abbreviated report of the Current Conditions Index for March of 2012. If you are interested in reading the entire report with tables and The Bottom Line, please go to my web page: http://www.llardaro.com .
In my report last month, I noted that
based on the existing labor market data being released by the RI Department of
Labor and Training, “ … it is no longer clear whether the Rhode Island is still
in a recovery or whether it has moved into the earliest stages of a dreaded
double-dip recession. Payroll employment has now declined for seven
consecutive months on a year-over-year basis … For many, this alone
would be a sufficient basis upon which to make the recession call.”
After my report was released, I was
informed by the RI DLT that the current labor market data has been understating
job change, and that employment has been rising for some time now. So, remember
all the data they were and are still publishing and the conclusions anyone
serious about analyzing our state’s economy would arrive at based on them? To
quote Emily Litella of Saturday Night Live fame: “Never Mind.”
So, in an odd and circuitous way, my
overall conclusion last month that Rhode Island has not entered nor is about to
enter into a recession proved to be correct. And, in spite of what the data
published by the DLT now say, our state’s March Unemployment Rate is not
11.1 percent, but somewhat lower, likely in the 10-11 percent range.
All of this requires that I adapt CCI
values. Since existing labor market data are very likely understating
two CCI indicators, Private Service Producing Employment and Employment
Service Jobs, I will now be providing two CCI estimates each month
until the data flaws disappear (hopefully) next February.
Rhode Island ended the first quarter of
2012 on a positive note, as a re-acceleration from the mid-2011 doldrums
materialized. While Current Conditions Index values based on the faulty
existing labor market data continued to show readings barely above stall speed
(the top values), allowing for likely data revisions, the CCI beat or tied its
year-earlier values for every month in the first quarter (the lower values). As
of March, Rhode Island’s current recovery reached its 25th month.
On a year-over-year basis, four of the
five non-survey-based CCI indicators improved. All five showed improvement on a
monthly basis. Retail Sales increased by 4.4 percent, its seventh
consecutive improvement compared to year-earlier values. While part of this is
no doubt related to the skilled Rhode Islanders we rent out to neighboring
states who bring their income home with them, Retail Sales momentum
clearly does have “legs” at present. Along with this, US Consumer Sentiment
rose as well, by 13 percent. Both of these indicators had March values that
exceeded their February levels. New home construction, based on Single-Unit
Permits, continued its roller coaster ride, falling by 14 percent in March
relative to last year. But it too managed to improve relative to February. New
Claims for Unemployment Insurance, a leading labor market indicator that
reflects layoffs, declined by 7.1 percent, its fourth improvement in the last
five months. It too showed strength relative to February. Finally, Benefit
Exhaustions, reflective of longer-term unemployment, also fell, at a
In the last post I demonstrated that significant differences often emerge when values are adjusted for inflation. Even though all of our transactions are in terms of current dollars, meaning inflation is not explicitly taken into account, what matters most is real, or inflation adjusted values. This distinction is critical. As we saw earlier with respect to retail sales, and I will now demonstrate with labor income, even though current dollar values might indicate that things are going fairly well, when inflation is taken into account, a very different story emerges.
At the recent Revenue Estimating Conference, there was a good deal of discussion of something I discussed a few posts ago, that the labor market data will be revised higher than what the currently-published values show. That was and continues to be welcome news. The discussion then moved to labor income, which economist refer to as wage and salary disbursements (WSD). Clearly, this indicator has been doing fairly well recently and Rhode Island it has certainly moved beyond the lows it experienced at the depths of "The Great Recession." Should we interpret this as indicating that we have returned to where our economy needs to be, or that we have made a very substantial recovery up to this point? I'll let you judge for yourself. The chart below (click to enlarge) shows current dollar wage and salary disbursements for the US, New England, Massachusetts, Connecticut, and Rhode Island. All of these are expressed as a percentage of their value in the first quarter of 2005 (that is the value of 100).
If you've been following this blog, the pattern shown in the above chart should not be unexpected: Rhode Island's peak occurred at a value well below that of the other entities in the chart. And while the level of its WSD has been growing since its most recent trough in Q1 of 2009, it remains significantly lower than everyone else in the chart. The interesting feature is that Rhode Island's peak occurred at the same time as that for everyone else, in Q1 of 2008. Also, note that at present, wage and salary disbursements exceed that 2008 peak for everyone in the chart.
Since the first quarter of 2009, Rhode Island's wage and salary disbursements have clearly been growing. At present, they are in a very well-defined uptrend. Based on this, should we then conclude that the recovery here is proceeding nicely? To many people the answer is definitely yes. To make a meaningful judgment about this, however, it is necessary to delve deeper and to take inflation into account. In other words, it is necessary to examine the behavior of real wage and salary disbursements. The next chart (click to enlarge) shows this over the same time period.
In what should come as a surprise to almost nobody, when inflation is taken into account, things aren't quite as rosy. This is especially true for Rhode Island. And, let's be honest, Connecticut isn't doing that great either. For Rhode Island, while we have managed to move above our trough in Q1 of 2010, we have only been able to return as far as our most recent peak, in Q3 of 2010. Rhode Island is the only entity in the above chart that has failed to move above its value for that quarter.
Will Rhode Island move above that value? In order to see what is necessary for this to occur, I need to quickly review a relationship concerning real values:
The percentage change in a real value (such as WSD)
the growth in its current-dollar value
the rate of inflation
Note from this that nominal growth (meaning current dollar growth) does not guarantee real growth. For real growth to occur, one hurdle must be surpassed. That hurdle is the rate of inflation. Therefore, if real wage and salary disbursements here are to break their most recent peak, it will be necessary for them to grow at a rate faster than inflation, which is currently around 2.0 to 2.5%.
Were the currently-released labor market data accurate, this might be fairly unlikely. Happily, the better-performing revised data make this highly likely. But even though our state's labor market is performing better than we had been led to believe, it's still not growing at rates resembling that in the rest of New England, the US, or southern New England, at least on a consistent basis. So, it's safe to say that while Rhode Island will break its recent peak in real WSD, it will continue to lag the levels attained by all of those entities.
One of the current success stories of late for Rhode Island has to be retail sales. Not only has retail sales been in a well-defined uptrend since the last quarter of 2009, at the present time it is very close to its highest level since 1990.
Retail sales can be either a coincident or lagging indicator, meaning that it either reflects what is going on at the present time or what has recently occurred. For Rhode Island, the most timely data on retail sales is that for retail sales subject to the sales tax. Based on when these taxes are paid and recorded here versus when the sales actually took place, retail sales for Rhode Island is a lagging indicator. Also, retail sales is a very cyclically sensitive indicator, which means the value of retail sales is very sensitive to the overall level of economic activity. The technical term for this is that retail sales are pro-cyclical, since they move in the same direction as the economy.
Like any economic indicator, it too has its limitations: since this is based on retail sales tax collections in Rhode Island, it excludes any items that are not currently subject to taxation, most notably clothing. And there can be distortions. For example, given the very mild winter, winter clothing expenditure very likely fell since the same time last year. If that decline was sufficient to move total retail sales lower than they were last year, the understatement from excluding clothing sales from our sales tax data might not be as large as it typically is. Similarly, since the meals tax in Rhode Island has been 14.7% higher than the regular sales tax rate for several years now, this has distorted "retail sales" for meals over this period -- tending to overstate the overall total. While this may sound like minutia, it is important to understand that every economic indicator has its share of "baggage." I have believed for quite some time now that the indicator any person likes best is probably the one that person knows the least about.
Let's take a look at the historical performance of retail sales in Rhode Island, using as our basis quarterly data on retail sales subject to the sales tax expressed at an annual rate. The chart below (click to enlarge) shows values since the first quarter of 1990. Please note that the vertical axis is stated in logarithms, mainly because a given vertical distance represents the same percentage (relative) change between any two period in the chart.
The most recent peak in retail sales occurred in the fourth quarter of 2006, at $12.7 billion. Can you think of anything else that happened that quarter (hint: we have discussed this numerous times in prior posts)? The answer: it coincides with Rhode Island's most recent employment peak. This reflects the fact that retail sales are very sensitive to the overall level of economic activity, as stated earlier. The trough for retail sales was in the fourth quarter of 2009, at $11.2 billion. Thus, Rhode Island's peak-to-trough decline in retail sales was 11.8 percent. Note that retail sales have trended upward throughout this recovery, although not straight up. Once again, the cyclical nature of retail sales is in evidence here.
This chart provides an excellent illustration of the mindset of most, if not all, of Rhode Island's leaders, its media, and its residents: things here have now turned around nicely, and Rhode Island is doing much better it has in a very long time. Add to this the fact that income tax revenue is up, at least above expectations, and if you read my last post, employment is apparently higher and our state's jobless rate is lower than the currently published data indicate. Thus everything appears to have returned to normal.
I agree totally with the assessment that everything here has returned to normal -- but Rhode Island's "new normal." In economics, we never look at things in absolutes. Instead, we always evaluate things in relative terms. This precludes our making substantive judgments about the behavior of indicators that are stated in current dollars, as retail sales is above. So, let's now turn to evaluating retail sales here in relative terms -- meaning relative to the purchasing power of the present time. This, recall, means examining the historical behavior of real retail sales.
The next chart shows the behavior of real retail sales subject to the sales tax for Rhode Island since 1990 (click to enlarge). As should become readily apparent almost immediately, this gives a very different picture of our current situation.
When taking inflation and purchasing power into account, the peak in real retail sales occurred in the third quarter of 2004, at $14.8 billion. This peak thus came well before the current dollar peak (in 2006Q4). Note that by stating retail sales in the purchasing power of Q1 in 2012, we are "inflating" current dollar values from earlier periods into what they would be if dollars then had the same purchasing power as today, which explains why earlier current dollar values are higher when stated in real terms. The trough in real retail sales occurred in the fourth quarter of 2009, at $11.9 billion. This is the same quarter as the trough in current dollar retail sales.
The reality of Rhode Island's current situation, our "new normal," to quote the phrase coined by Mohammed El-Erian of PIMCO, is in fact very different from the predominant view of our state's economic performance. First, real retail sales here have been falling since the third quarter of 2004, well before our most recent employment peak. Second, the peak-to-trough decline in real retail sales here was much greater than one would conclude based on current dollar values, just under 20 percent. Third, while real retail sales have improved since their trough in 2009Q4, they have registered almost no gain since that time: $12.1 billion versus $11.9 billion. Finally, the most recent trend in real retail sales is sideways to downward. Thus, Rhode Island's economy has failed to perform well enough to consistently generate retail sales growth rates in excess of inflation for quite some time now.
Where does all of this leave us? Not where almost everyone in this state appears to believe. Retail sales data, when viewed in the correct context of real values, confirms something I have written about in more posts than I care to think about, that Rhode Island is in a very tepid recovery. So, even when (or if) current dollar retail sales here exceeds it recent high of $12.1 billion, we will not have returned to anywhere even remotely close to where we once were. So, do we continue to contrast the current situation with the depths of where we once were, as seems to be the dominant view, or should we shift our focus to where we are relative to recent heights? You can guess which I will continue to opt for.
We should be attempting to move toward recent highs -- that should be the standard of excellence or satisfactory performance here. And, guess what? That outcome doesn't just fall on us from heaven. We have to work for it. And very often, this will require that we work very hard to get there. I heard a great saying a few months ago that pertains to this: "Success is not a destination, it is a journey." It's time for Rhode Island to purchase its ticket for this journey, because the dominant perspective here, to dust off an old phrase I used to use to describe Rhode Island about a decade ago, defines success in terms of "Relative Mediocrity."
As we recently discovered, the revised data on Rhode Island's payroll employment are going to be significantly different than the currently published numbers. First, these will now be calculated by the US Bureau of Labor Statistics (BLS). The BLS will not incorporate Rhode Island's idiosyncrasies, as manifested in its idiosyncratic data, in the same way as the Rhode Island Department of Labor and Training (DLT) has in the past. Second, as the basis for making ongoing monthly estimates of Rhode Island's payroll employment with the Current Employment Survey (CES), BLS projections will start with an earlier time period than has historically been used by Rhode Island's DLT. As a general forecasting rule, the farther from known data one projects, the greater the variability of the estimates will likely be. Taken together, these changes can be viewed as constituting a different methodology. Most importantly, expect this new methodology, which officially begins with the February 2013 data report, to produce differences with respect to both the reported values of payroll employment each month, and even more importantly, their volatility through time.
Today's ProJo story by Kate Bramson quoted an economist from the BLS New England office in Boston, Timothy Consedine, as stating the reasons for these changes: " ... to improve cost efficiency and 'to reduce the potential for statistical bias in state and area estimates.' "
It's certainly hard to argue with either of these noble intentions. Now let's put these assertions to a test. Since March of 2011, the manufacturing wage data for Rhode Island has been calculated by the BLS. Assuming that Mr. Consedine's assertions are correct, manufacturing wage data here should have improved at least by a bit, if not by a great amount, since the BLS took over their estimation. There has indeed been an extremely visible difference since that time. I won't tell you what it is. Instead, I will provide two charts of Rhode Island's manufacturing wage behavior and let you see if you can figure out what this change has been. In both charts, RI and US wages are contrasted. The first chart (click to enlarge) shows US and RI manufacturing wage growth since January of 2008.
Below is an abbreviated version of the February Current Conditions Index report. The full report (with indicator table) is available on my web site: http://www.llardaro.com/ . The value of the CCI, 50, its neutral value. Based on currently released
data, Rhode Island is at a near standstill.
Apparently, however, data revisions
that will occur with the next round of rebenchmarking (to be released next
February), paint an entirely different picture of the behavior of employment.
In other words, the currently released employment data is far off the mark:
while the currently published data show seven consecutive employment declines
(year-over-year), according to the revised data, no declines might have
actually occurred. Let me be clear about this: this is in no way the fault of the RI Department of Labor and Training (DLT). Instead, it is the direct outcome of the different methodology utilized by the US Bureau of Labor Statistics (BLS) for obtaining employment values that will be replacing the methodology historically used by the Rhode Island DLT with the next data rebenchmarking.
So, assuming that actual employment is apparently moving
in the opposite direction of the values currently being published, the most
likely changes to the February CCI would pertain to both Employment Service
Jobs and Private Service-Producing Employment. Even though each of these
declined according to the existing data, it is highly likely that both will
have increased according to the newly revised ("shadow") data. If
that is what ultimately ends up occurring, the February CCI value will increase
to 67, a very different value than the 50 based on the data the DLT is
publishing at present.
I'm sorry for the confusion, but up to now, I have always
been able to rely on the data published by the DLT. I still have full confidence in the RI DLT. However, it will now be necessary to begin relying far more heavily on the US BLS. Effectively, Rhode Island will be "homogenized" based on their national models. So for now, until the newly rebenchmarked data are released in February, it
will be necessary for me to publish a range of likely CCI values -- until the BLS "shadow" employment numbers coincide with those being released by
Rhode Island's manufacturing sector, like that of the nation, has continued to perform extremely well since 2009. Ironically, 2012 marks the 25th anniversary of Rhode Island being a post-manufacturing economy (here is the basis for this). Since late 1987, when this structural transformation occurred, the sectors that have led in the early stages of recoveries have conspicuously excluded our state's goods producing sector -- manufacturing and construction. So, while construction continues to remain extremely weak and depressed here, adding a further downdraft to our state's already weak economic momentum, manufacturing has provided a welcome boost throughout this entire recovery.
There are a number of reasons why US manufacturing (and related to this -- exports) has done so well. First and foremost is the US Dollar exchange rate. The dollar depreciation that has occurred over the past few years, driven largely by the extremely low interest rates orchestrated by the Federal Reserve, has made exports from the US much more competitive to foreign buyers than they otherwise would be. In addition to this, appreciation of the Japanese Yen has caused production costs there to become unacceptably high to a number of manufacturers, leading them to shift their Japanese production to other countries. To some extent, US manufacturing has benefited from this. Then there is the success of China as an exporter, which has produced upward pressure on manufacturing wages there and upward pressure on their currency, the Chinese Yuan. Finally, political pressure that continues to be applied to US manufacturers has led them to move some of their operations back to the US. The extent to which these factors have benefited Rhode Island manufacturing is not clear at this time. Since a study of this topic would entail due diligence, it is safe to conclude that no such study will ever occur here.
For Rhode Island, much of the recent manufacturing strength has been manifested in a return of the workweek from the highly depressed values it fell to during "The Great Recession" to more typical values. During the past three months, the workweek here has moved beyond the 40-hour level. In February of 2012, the average workweek, 40.7 hours, was the fifth highest length since 2000 (using the new industrial classification system that is as far back as we can go). The chart below (click to enlarge) shows Rhode Island's manufacturing workweek since 2000.
The first thing that stands out in this chart is the well-defined uptrend in the workweek since the trough in July of 2009 (before RI's current recovery began). Second, for the last three months (December of 2011 - February of 2012), the workweek has exceeded 40 hours, something Rhode Island hasn't seen since 2000. Finally, at its present level, the manufacturing workweek in Rhode Island is not very far from its "record" level over this period of 41.2 hours.
So, along with the very favorable workweek behavior comes a potential caveat for the coming months: sustaining or even increasing the workweek in the future will not be an easy task. If the workweek begins to return to more "typical" levels, between 39 and 40 hours, which elements of our state's economy will take the "baton" and help to sustain Rhode Island's forward economic momentum from that time forward? The answer to that question is not at all obvious at the present time. In fact, even with all of this recent welcome manufacturing momentum, the negative forces at work here may well have gained the upper hand, to such an extent that Rhode Island's recovery might actually be over at the present time (see prior post that discusses this).
Let me conclude by noting that the substantially higher workweek we have been witnessing here represents firms substituting hours for the hiring of additional workers. As the inadequacy of the skills of Rhode Island's labor force is not debatable at this point, and as far as I can tell, nobody has ever accused Rhode Island's business climate of being competitive, the cost to firms associated with increasing employment, both in terms of skills and other costs, may well remain unacceptably high for our manufacturing firms for some time to come. This will remain central to defining our state's "limits to growth."
Rhode Island never seems to do things like other states do. Sometimes that can be a good thing. But when it comes to economic performance, it has proven to be a nightmare: Our nightmare -- an extremely tepid recovery that might now be over.
In my first post on this Blog, I provided a series of charts comparing Rhode Island to the US, New England, Massachusetts, and Connecticut. I have (sadly) updated the most important of them, payroll employment, with the most recent data. The chart below shows this (caution: if you have just eaten, you should probably wait about an hour before viewing this chart. For those who haven't just eaten, click to enlarge):
I would hope that most people are aware of the following stylized facts that should be readily apparent from the chart:
Payroll employment in Rhode Island peaked in December of 2006, well before the peaks in the US, New England, Massachusetts, or Connecticut;
Rhode Island's payroll employment fell by a greater percentage than any of the other entities in the chart, by 8% from its peak;
At its best during this recovery Rhode Island's payroll employment moved back to just slightly above 93 percent of its prior peak;
All of the other entities in the chart have seen rising employment for some time now, moving ever closer to their prior peaks while Rhode Island has regressed -- its payroll employment is declining, falling back to just above 92 percent of its peak level.
If you want to see what is happening to the unemployment rate in all of these entities, flip this chart upside down. This explains why Rhode Island has such a stubbornly high jobless rate -- we're not creating jobs!
An observation: during recoveries, payroll employment is supposed to continually rise. But this is Rhode Island. We don't do things here the same as everywhere else. If you look at my prior few posts, payroll employment in Rhode Island has now declined on a year-over-year basis for the past seven months. That by itself might be a sufficient basis to believe Rhode Island's recovery has ended and we have entered into the early stages of a double-dip recession. At present, I am not quite ready to make that call, but I think it is safe to say that if we are still in a recovery, we're hanging on by our proverbial finger nails.
The last several posts have explored why Rhode Island has such a high unemployment rate. As of February, 2012, we have regained the dubious national rank of #2. If you saw the February labor market data for Rhode Island, the one number that probably stuck out was that our state's unemployment rate returned to 11 percent from just below that level the prior month. As for good news, the local media seemed to focus primarily on the 500 gain in payroll employment (seasonally adjusted). Actually, don't be very confident that the 500 gain will survive the data revisions associated with the release of the March data.
Actually there was good news in the February report -- our state's manufacturing sector continues to improve. Both manufacturing employment and the workweek rose, very positive signs. And, our state's manufacturing wage continued to increase at an almost 20 percent year-over-year rate, if you are willing to believe that data (I don't!). Apparently there continues to be some life in Rhode Island's goods-producing sector, in spite of continued housing weakness!
By now, you should be aware of how many ironies permeate the existing labor market data for Rhode Island. To say this state is idiosyncratic is an understatement. So, let's delve into even more possible "confusion," focusing on labor force participation here and how its bad news has ironically translated into less horrible news for our jobless rate.
A state's labor force participation rate is the percentage of its working-age population that is in its labor force. For just about every state except Rhode Island, the labor force participation rate is pro-cyclical, meaning it changes in the same direction as overall economic activity. During recoveries, the participation rate rises, as a larger proportion of the working-age population becomes part of the labor force. Similarly, during recessions, the participation rate tends to decline, as some persons stop actively seeking work, which excludes them from being counted as part of the labor force. The reason why I noted this behavior is sadly not true for Rhode Island can be seen very readily from the following graph of our state's labor force participation rate since 2009 (click to enlarge).
Based on my Current Conditions Index, Rhode Island's present recovery began in February of 2010. As the above chart shows, Rhode Island's labor force participation rate has been declining throughout almost this entire recovery! So much for a pro-cyclical participation rate. Keep in mind, however, our state's employment rate has also been falling for quite a while (see prior post).
The irony associated with our state's declining participation rate is that it has actually kept Rhode Island's unemployment rate lower than it would have been had our state's residents not continued to drop out of the labor force. This is the "bad news translating into less horrible news" I referred to above.
All of this leads to an obvious question: How much higher would Rhode Island's unemployment rate have been were it not for the "benefit" of our declining participation rate? In order to approximate this, I performed a quick econometric simulation, assuming that our participation had not been declining from its most recent peak in April of 2010. The results are not pretty, nor are they unexpected. The chart below compares the actual and simulated unemployment rates here since 2009 (click to enlarge if you have a strong stomach!).
Instead of having an 11 percent unemployment rate for February of 2012, my simulation produced a rate of 11.6 percent. In the above chart, note the divergences between actual and simulated unemployment rates since August of last year. About the only good thing that can be concluded from this chart is that the two series have gotten closer of late. That is hardly a source of comfort, however, especially since at an 11 percent rate, Rhode Island has a national rank of second overall.
In conclusion, is Rhode Island's declining labor force participation rate a major problem? Indeed it is. Not only is it the logical result of a truly deplorable labor market, where both payroll and resident employment have been falling on a year-over-year basis for quite some time now. It may single-handedly be preventing Rhode Island from reclaiming its prior title as the highest unemployment rate in the entire United States!
In the last several posts I analyzed the historical behavior of the number of jobs in Rhode Island, payroll employment, and the number of Rhode Island residents who are employed, resident employment. As I noted, there are significant differences between these two data series, especially since they are obtained from two separate labor market surveys.
In this post, I will provide only one chart, but that chart will allow you to understand very readily why Rhode Island's unemployment is so high and why it hasn't been falling as one would expect during a recovery. Of course, as I was writing that last sentence, I realized that there is a distinct possibility that Rhode Island is no longer in a recovery, which I discussed in the last two posts. For now, I still haven't concluded that Rhode Island has actually entered a double-dip recession, so as far as I can tell, Rhode Island is clinging to its two-year old recovery by its finger nails. I guess this makes it fortunate that we didn't raise the sales tax on finger nail establishment services last year!
I want to focus on the employment rate for Rhode Island: the ratio of resident employment to the resident working-age population. Both of these series are derived from the household survey. Ideally, this ratio should rise during recoveries, as the number of employed residents rises as a proportion of the working-age population, and fall during recessions, as employed residents become a smaller proportion of the population. But this is Rhode Island -- we don't do things like everyone else!
The chart below shows the historical behavior of the employment rate for Rhode Island since January of 2000 (click to enlarge).
When Rhode Island's payroll employment peaked all the way back in December of 2006 (a full year before the US peak), our state's employment rate reached its maximum at just below 66 percent (0.66 in the chart). It has literally been all downhill since then.
Clearly, the serious recession we experienced brought about continuous large reductions in the proportion of our state's population that is employed. However, consistent with the charts from the previous two posts, Rhode Island's employment rate has been declining throughout this entire recovery!At the end of the last recession, around late 2009 into very early 2010, the employment rate actually recovered a bit, moving back to 60 percent. Ironically, since our current (?) recovery began in February of 2010, we have seen a clear downtrend in this ratio.
The inevitable consequence of the fact that an ever-smaller proportion of Rhode Island's population remains employed (our declining employment rate) has been a high unemployment rate that seems incapable of falling below 11 percent over any prolonged period of time.
There are several ironic elements in all of this. Recall that resident employment is not restricted to jobs in Rhode Island. It includes Rhode Island residents who work either in Rhode Island or in other places. That is significant at the present time since Massachusetts is doing so much better than Rhode Island is, as its jobless rate is one we can only fantasize about here. Also, resident employment includes self-employed persons, an element that often escapes from the other labor market survey. Positive out-of-state and self-employment should have been able to at least moderate if not reverse our declining employment rate by this point. Yet it hasn't.
To conclude, let me briefly cite the math that underlies a declining ratio. The fact that the employment rate, the ratio of resident employment to our working-age population, is falling through time means that in percentage terms, resident employment has been falling relative to our state's working-age population. It doesn't take much to figure out that this has played a central element in our state's high unemployment rate.