Current Conditions Index: October 2013

Below is a partial version of the October Current Conditions Index report. The full report, which includes tables and historical data, can be found on my web site: www.llardaro.com .

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Rhode Island began the fourth quarter by continuing its positive, though not exactly stunning, momentum. Once again, there was both good news and bad news concerning Rhode Island’s economic performance. First, the good news: the Current Conditions Index rose from 67 (revised down) in September to 75 in October, as nine of its twelve indicators improved. Importantly, several of those improvements were quite stunning. The bad good news emerges when we contrast our state’s performance this year with that in 2012: for a third consecutive month, and the fourth time in five months, the CCI has failed to exceed its year-earlier value. I strongly suspect that this will be the dominant pattern throughout the fourth quarter. If this conjecture proves correct, which I believe it will, we will experience a slowing in our rate of growth relative to the end of last year. One could argue that the late-2012 acceleration confronts us this year with a difficult “comp,” which is true. However, as our state’s current rate of growth is not terribly rapid (Rhode Island’s growth rate in real state GDP for 2012 was only 1.4%), the test of how robust this recovery will ultimately prove to be will be defined by our ability to accelerate rather than sustain growth rates comparable to what we observed at the end of 2012. Fortunately, the US economy is growing more rapidly, which will clearly benefit Rhode Island.

One hint of future momentum can be inferred from the October performance of the leading indicators contained in the CCI. For October, four of the five leading indicators improved in spite of difficult “comps” from a year ago. The only leading indicator that failed to improve, US Consumer Sentiment, fell sharply (-11%), but this was heavily influenced by a one-two punch: the combination of the government shutdown and its rise of over 37 percent last October.  While October was the second consecutive decline for Sentiment, it remains in a well-defined uptrend that will likely continue as long as the stock market continues to rise.

So, while our state’s economic momentum appears to be slowing a bit, substantial momentum remains, based on the performances of both the leading indicators contained in the CCI and several of its non-leading indicators. Sadly, this means it will take longer for us to return to our prior peak in economic activity. Welcome to our world! Our elected officials have yet to fully grasp that success in a post-manufacturing economy requires consistent and persistent effort to make improvements to a state’s economy, not merely waiting for things to “turn around.” 

All of the remaining leading indicators improved in October. The uptrend in Single-Unit Permits, a leading indicator of housing, continued with a vengeance, rising 61.3 percent relative to last October. Clearly, Rhode Island’s housing sector is continuing to move well beyond its recession trough.  Employment Service Jobs, which includes temporary employment, a prerequisite to overall employment growth, rose by a healthy 4.2 percent in October. It has declined only once in over a year and it remains in a clear uptrend. New Claims for Unemployment Insurance, the most timely measure of layoffs, improved in October, falling by 8.9 percent in spite of a very large decline last year (-9.8%). Unlike the leading indicators discussed earlier, this indicator is not in a well-defined downtrend at present. Should it begin to rise, it would threaten our state’s future momentum, since a trend of rising layoffs would adversely affect other CCI indicators in coming months, most notably Retail Sales. The final leading indicator, Total Manufacturing Hours, which measures strength in our manufacturing sector, rose by 2.4 percent in October. This indicator has improved for ten of the last twelve months, something I never thought I would see again, especially as one of the foundations of our recovery’s momentum.

Current Conditions Index: September 2013

Below is a partial version of the September Current Conditions Index report. The full report, which includes tables and historical data, can be found on my web site: www.llardaro.com .

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Rhode Island ended the third quarter on a fairly positive but mixed note, as there was both good news and bad news about our state’s performance. First, the good news: the Current Conditions Index rose from 67 in August to 75 in September, as nine indicators improved overall. Several of those improvements were very substantial changes. The bad good news comes when we contrast our state’s performance this year with that last year: for a second consecutive month, and the third time in four months, the CCI failed to exceed its year-earlier value. During the fourth quarter, it is not unreasonable for us to expect to see this pattern repeated every month. This has been a concern of mine for some time now, and I have written about it in the last few reports, for if this does come to pass, as is likely, it would reflect a definite slowdown in our rate of growth relative to the end of last year.  However, in light of the clear acceleration in the pace of economic activity for Rhode Island as 2012 came to an end, this does not come as much of a surprise. The October CCI results will be quite interesting, as they will reflect not only the fiscal drag from Washington, but the effects of the government shutdown as well. 

In light of these uncertainties moving forward, it is informative to examine the performance of the leading indicators contained in the CCI. For September, three of the four leading indicators improved in spite of difficult “comps” from a year ago. The only leading indicator that failed to improve, US Consumer Sentiment, fell only slightly (by 0.3%), but this relatively small decline occurred relative to a rise of over 33 percent last September.   

So, as we move into the last quarter of 2013, our state’s momentum may be losing a step or two, but a substantial amount of momentum remains, as attested to by the performances of both the leading indicators contained in the CCI and several of its non-leading indicators. This means we will just have to wait longer to ultimately return to where our state’s economy was prior to the Great Recession. Our recent rates of growth applied to the depressed activity levels Rhode Island fell to will continue to generate relatively small changes in the actual activity levels.

As stated earlier, three of the CCI’s four leading indicators improved in September. The uptrend in Single-Unit Permits, a leading indicator of housing, continues, as we have moved well beyond our recession trough (note: the September Permits value is an estimate as the government shutdown has caused a delay in its release until next week). US Consumer Sentiment failed to improve for the first time since January. However, it had an extremely difficult “comp” from last September. In spite of this temporary setback, Sentiment remains in a well-established uptrend that promises to continue as long as the stock market continues to improve.

The remaining leading indicators are related to the labor market. The first of these, Employment Service Jobs, which includes temporary employment, a prerequisite to overall employment growth, rose by a healthy 3.4 percent in September. Its decline last month was the first in over a year. Like US Consumer Sentiment, this one-month problem does not threaten its longer-term uptrend, something that will be important as we move to the last quarter of this year. New Claims for Unemployment Insurance, the most timely measure of layoffs, improved in September, falling by 7.9 percent in spite of a very large decline last year (-25.1%). At present it has no clear trend, which is potentially problematic since a trend of rising layoffs would adversely affect other CCI indicators in coming months. The final leading indicator, Total Manufacturing Hours, which measures strength in our manufacturing sector, rose by 1.6%.

 

 

 

Current Conditions Index: August 2013

Below is a partial version of the August Current Conditions Index report. The full report, which includes tables and historical data, can be found on my web site: www.llardaro.com .

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As the third quarter progresses, there is both good news and bad news about the performance of Rhode Island’s economy. The good news is that the July Current Conditions Index’s value was revised higher, from 75 to 83. The bad news is that the CCI for August declined to 67, as only eight of twelve indicators improved relative to their values one year ago. Furthermore, August was only the second month this year for which the CCI failed to exceed its year-earlier value (June was the other). My primary concern moving forward, which I have written about for several months now, is that the CCI for the remainder of this year will very likely fail to beat last year’s values, which would reflect a clear slowdown in our rate of growth relative to the end of last year. This should not come as a complete surprise given the clear acceleration in the pace of economic activity for Rhode Island as 2012 came to an end. Sadly, but not surprisingly, the combination of fiscal drag from Washington and the government shutdown should only make these yearly divergences worse.   

At times like this it is informative to look at the performance of the leading indicators contained in the CCI. For August, all four of these had difficult “comps” from a year ago. Only two, however, were able to improve relative to those comps. Don’t expect this to be the last time we encounter this phenomenon.   

Let me reiterate an important point that will become ever-more relevant that is related to the seeming paradox of how our state's economy can be showing good momentum yet fail to return to where it was in 2006 and 2007. Current levels of economic activity depend on both the rates of growth we are experiencing and the prior activity levels themselves. Rhode Island’s economy was extremely hard hit during The Great Recession, so, when our recent rates of growth are applied to these depressed activity levels, we continue to see relatively small changes in the actual level of economic activity. As our rate of growth is slowing, it will now take even longer to return to where we were pre-recession.

As stated earlier, two of the CCI’s four leading indicators improved in August. The uptrend in Single-Unit Permits, a leading indicator of housing, continues, although this indicator failed to improve in August (last August its rate of growth was 34%). In spite of this setback, Permits have now settled into a range of 70+ each month. US Consumer Sentiment improved for the seventh consecutive month in August, rising 10.7 percent. Expect to see it began to weaken, given our nation’s fiscal dysfunction.

 

The remaining leading indicators are related to the labor market. The first of these, Employment Service Jobs, which includes temporary employment, a prerequisite to overall employment growth, fell for the first time in over a year. It registered a decline of 2.1 percent relative to its 5 percent rise last August. While this indicator has generally improved since last April, its slowing rate of improvement coupled with an August decline calls into question whether it will sustain its uptrend. New Claims for Unemployment Insurance, the most timely measure of layoffs, appears to now be in an uptrend (note: we want this to decline), as it has now risen for five of the last seven months. A trend of rising layoffs will adversely affect other CCI indicators in coming months, most notably Retail Sales. The final leading indicator, Total Manufacturing Hours, which measures strength in our manufacturing sector, barely rose (by 0.6%). Its recent performance has been spotty in light of stronger global economies that boost exports and a weakening US economy.

Current Conditions Index: July 2013

Below is a partial version of the July Current Conditions Index report. The full report, which includes tables and historical data, can be found on my web site: www.llardaro.com .
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Rhode Island began the third quarter on a very positive note, as the pace of activity during the second quarter was sustained. The performance of Rhode Island’s economy for July was quite good, with the Current Conditions Index registering a value of 75, as nine of 12 indicators improved. Importantly, the overall strength of most of the leading indicators contained in the CCI has continued through all of this year (including July), which is a welcome occurrence as we enter the final half of the year.

Importantly, the primary negative from last month was eliminated in July — the CCI once again beat its value from a year ago. So, only once this year, June, has the CCI failed to beat its year-earlier level. Given the strength we witnessed starting in August of last year, we may well witness several more months where the CCI is unable to exceed its prior-year values, which will reflect a slowing in our rate of growth. Let’s cross that bridge when we get to it. For now, we should be focusing on all of the positive news contained in this month’s data along with Rhode Island's economic performance thus far in 2013.

Before doing this, let me to reiterate a point I made last month. Many remain confused by the seeming paradox of how a state's economy showing such momentum can remain so far below where it was back in 2006 and 2007. The answer, plain and simply, is that current levels of economic activity depend on both the rates of growth we are experiencing and the prior activity levels themselves. During The Great Recession, Rhode Island’s overall economy along with many of its indicators, declined greatly, about as far, if not farther, than just about any other state. So, our recent rates of growth applied to these depressed activity levels continue to generate relatively small changes in the actual level of economic activity here. Don’t expect this to change any time soon!  Rhode Island has yet to undertake the hard work required to reinvent itself and to make its economy more competitive. Recent organizational changes will do virtually nothing return us to where we once were.

All four of the CCI’s leading indicators turned in strong performances this month. Three of them did so in spite of very strong “comps” from a year ago. The uptrend in Single-Unit Permits, a leading indicator of housing, continued, reflecting further movement beyond its trough. Permits rose 6 percent in July and have now settled into a range of 70+ each month. US Consumer Sentiment improved for the sixth consecutive month in July, rising 17.7 percent.

The remaining leading indicators are related to the labor market. The first of these, Employment Service Jobs, which includes temporary employment, a prerequisite to overall employment growth, rose by 1.5 percent in July. While this indicator has consistently improved since last April, its rate of improvement has clearly slowed of late. New Claims for Unemployment Insurance is the most timely measure of layoffs. It recently appeared to be returning to a downtrend, but this change is not apparent at present. New Claims rose by 2.2 percent in July, its fourth increase in the last six months. Declining layoffs will be critical if Rhode Island is to continue improving as we move through the second half of the year. The fourth of the CCI’s leading indicators, Total Manufacturing Hours, which measures strength in our manufacturing sector, jumped by a very healthy 4.1 percent, driven by higher employment and the workweek.

 

 

Current Conditions Index: June 2013

Below is a partial version of the June Current Conditions Index report. The full report, which includes tables and historical data, can be found on my web site: www.llardaro.com .

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The second quarter for Rhode Island turned out to be significantly better than had been anticipated at the beginning of this year, consistent with the second quarter acceleration in the pace of national economic activity. The performance of Rhode Island’s economy for June was very good, as the Current Conditions Index registered a value of 75, with nine of 12 indicators improving. Importantly, the overall strength of most of the leading indicators contained in the CCI has been sustained over the first half of this year, a positive and welcome sign as we move into the remainder of this year.

The primary negative for this month is the fact that the CCI's value of 75 this June failed to beat last year’s level, the first time in 2013 that this has occurred. Given the strength we witnessed during the second half of 2012, this is not likely to be the last time this phenomenon occurs. In spite of this, there continues to be a significant amount of positive news in this month’s data as well as for Rhode Island's economic performance in 2013.

Before discussing this month’s indicator results, I need to clarify a point that appears to be confusing a number of persons I have spoken to over the past several months: If our state's economy has such strong momentum, why then are we still so far  below where we were back in 2006 and 2007? In order to answer this question, it is important to keep in mind that current levels of economic activity depend on both the rates of growth we have been experiencing as well as the prior activity levels themselves. This is where Rhode Island finds itself in such a frustrating situation. Rhode Island's economy was hit extremely hard during the last recession, as the level of economic activity here fell about as far, if not farther, than just about any other state. Therefore, satisfactory rates of growth applied to the highly depressed level of economic activity here has resulted in relatively small changes in the actual level of economic activity. Welcome to our world!

My greatest concern moving forward is that Rhode Island has failed to do the hard work required to reinvent itself and to make its economy more competitive. The organizational changes instituted during the last legislative session are good, but they fail to deal with our state’s most pressing problems. They represent little more than yet another swipe at the symptoms of our state’s structural problems, leaving our long-term weaknesses to fester.

Three of the CCI’s leading indicators turned in strong performances this month, and all of those did so in spite of very strong “comps.” The uptrend in Single-Unit Permits, a leading indicator of housing, continued, reflecting further movement beyond its trough. Permits have now settled into a range of about 70+ per month. The remaining leading indicators that improved are related to the labor market. The first of these, Employment Service Jobs, which includes temporary employment, a prerequisite to overall employment growth, rose by a healthy 4.6 percent in June. This indicator has consistently improved since last April. The other, New Claims for Unemployment Insurance, is the most timely measure of layoffs. It has now moved back into a clearly established downtrend, which is critical if Rhode Island is to continue improving as we move into the third quarter. The fourth of the CCI’s leading indicators, Total Manufacturing Hours, which measures strength in our manufacturing sector, failed to improve in June, based on a large drop in the workweek.

Current Conditions Index: May 2013

Below is a partial version of the May Current Conditions Index report. The full report, which includes tables and historical data, can be found on my web site: www.llardaro.com .

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The second quarter is progressing a little better for Rhode Island than had previously been thought. It has been apparent that during the first part of 2013, Rhode Island’s economy has not displayed as much momentum as it did during the second half of 2012. And, even though the Current Conditions Index values so far this year have lagged those from the final two quarters of last year, at least this year’s values had been better than the corresponding values one year ago, with the exception of April. Based on the most recent data, the April CCI value was revised higher, from 67 to 75, so it too bettered its year-earlier value. As for May, the CCI jumped to 83, with ten of twelve indicators improving, tying its highest value thus far for 2013. Furthermore, several of the CCI indicators in May improved despite difficult “comps” last May. So, overall, several trends continue to take shape and May points to the possibility that Rhode Island may re-accelerate in the second half of 2013. This is not an unreasonable possibility, especially since the US economy will likely continue to improve as we progress through 2013. The primary question for Rhode Island is therefore, whether the improved values later this year (assuming they occur) are improvements over the prior months from last year. This will not be easy for Rhode Island, but it is certainly not out of the question for us to see this occur. Any good news like that would be more than welcome for our state, which CNBC recently referred to in its survey of the Best States to Do Business as: “A perennial loser in our study...”     

Let me state one important caveat at this point: Don’t interpret the most recent data as indicating that Rhode Island’s economy has already substantially strengthened, or that it is in the process of jumping to much higher rates of growth. What we are seeing is that after consolidating the gains from late last year, Rhode Island’s economy has begun to gain momentum, at least through May. All of this is defining how Rhode Island’s economy continues to recover from The Great Recession.

All four of the CCI’s leading indicators turned in strong performances this month, several in spite of very strong “comps.” The continued uptrend in Single-Unit Permits, a leading indicator of housing, reflects continued movement beyond the low in new home construction. Permits have now settled into a range of about 70+ per month. The remaining leading indicators are related to the labor market. The first of these, Employment Service Jobs, which includes temporary employment, a prerequisite to overall employment growth, rose by a healthy 3.5 percent in May. This indicator has consistently improved since last April. The second leading labor market indicator, New Claims for Unemployment Insurance, reflects layoffs. It appears to have resumed a downtrend, which will be critical if Rhode Island is to continue improving as we move through 2013. The final leading indicator, Total Manufacturing Hours, measures strength in our manufacturing sector. This indicator rose again (by 1.0%), its tenth improvement in the last twelve months. Together with Single-Unit Permits, there has been continuous and sustained momentum in Rhode Island’s goods-producing sector.

 
US Consumer Sentiment improved for the fourth consecutive month, in spite of a difficult comp. Related to this, Retail Sales remained strong. While Rhode Island’s goods-producing sector is performing well, its service-producing sector has fared less well. The rate of growth in Private Service-Producing Employment remains well below a one percent rate (+0.4% in May). Its level has stabilized around 350,000.

RI's Economic Realities and the Reorganization of the EDC

This is an article I wrote in mid-May and submitted to The Providence Journal. They never  published it, which is unfortunate since the realities of the economic climate this state finds itself in have been entirely absent from the public discussion of potential changes to the EDC and any reorganizations that may occur.

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In recent days we have seen competing legislative proposals that seek to improve Rhode Island's approach economic development. These are clearly welcome and something we have to do. While these proposals contain a number of potentially significant differences, what has yet to be done is to outline several critical considerations that any such plan for Rhode Island must ultimately include.

There are a number of general principles that such plan must acknowledge. First and foremost, Rhode Island is a post-manufacturing economy and has been so for over twenty-five years. In a post-manufacturing economy, when layoffs occur, those jobs are often eliminated, resulting in permanent job separation. Therefore, during recoveries, it is necessary to create new jobs from scratch, which is both more risky and costlier than it was during the manufacturing era when workers were largely able to return to their prior jobs. Therefore, layoffs occur in both good times and bad, so job loss consistently accompanies job gains. While Rhode Island has seen job loss drop sharply since The Great Recession, job gain has remained sluggish, even as our economy has improved.

Second, back when Rhode Island was a manufacturing-based economy, changes were largely cyclical in nature. The economy would therefore turn itself around as soon as cyclical forces corrected themselves and quickly began producing more jobs and output, resulting in strong recoveries. Today, the economy doesn't just turn itself around because structural changes routinely accompany cyclical factors. Perhaps the greatest challenge in this regard is technology-induced gains in labor productivity. In order for a state to grow more rapidly, it must therefore earn it through proactive and continual improvement in its economic climate.

In light of these general principles, Rhode Island will need to initiate three institutional changes. The first of these, as acknowledged by the different plans, is the creation of a Council of economic advisers (CEA). However, unlike what has been described thus far, the CEA should not be relegated to merely gathering and disseminating data. That task is far more effectively accomplished using existing agencies such as the DLT. Instead, the CEA should define the specific data that need to be gathered in order for it to conduct in-depth economic analyses and to make policy recommendations.

For example, at present, Rhode Island has no idea how large its non-defense tech employment is. The CEA as I envision it would therefore commission the ongoing collection of that data through time, by industry, and by firm size, analyze it, determine both Rhode Island's strengths and weaknesses in this area, and make policy recommendations for meaningful and ongoing improvements.

What will become of this analysis undertaken by the CEA and its recommendations? That should form the basis of Rhode Island's economic plan. It is apparent from existing discussions that the proposers don’t really comprehend what such a plan would ultimately be or what should go into that plan. Worse yet, they seem to believe you can somehow come up with a plan, abandon it for four years, then dust it off and start again. In a post manufacturing economy that will never do. Any plan must be an ongoing and primary vision for the state's future based on in-depth economic analysis.

Finally, Rhode Island must create in-house capability to perform due diligence. This is the necessary condition for enlightened decision making. Its absence has been at the heart of many of the problems we have experienced over the past decades.

This newly instituted due diligence capability should be performed exclusively by economists with advanced degrees who have documented experience in undertaking such research (which includes the use of economic impact software). Once a culture of due diligence has been created, we will quickly learn the economic variables that matter, their interactions, and the actual magnitudes of their impacts. This knowledge can then be disseminated in digital form as reference not only for persons in state government, but to citizens of the state as well. Perhaps most importantly, this capability would at long last equip Rhode Island with the tools needed to combat “the numbers” provided by the various special interest groups.

Let me conclude by noting that the greatest change required in all of this will be attitudinal: If Rhode Island is to become far better managed, the culture of denial so prevalent in the approach of our state's elected officials to economic matters must end. Most importantly, as a matter of practice, accuracy has to supersede tone. I can't emphasize this point enough.

Are Rhode Island's elected officials capable of such attitudinal and institutional changes? I certainly hope so, since Rhode Island's future economic viability is tied to this. It isn’t too late for us to adapt to the kind of world we have been living in for the last twenty-five years and to stop assuming, or should I say, hoping, that our state’s economy will turn itself around and everything will be fine.