It Depends 2

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)

equals (approximately)

the growth in its current-dollar value

minus

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.

Rhode Island's Real GDP for 2010

We recently received the state real GDP data for the year 2010. The results, at first glance, seem encouraging: RI's 2010 growth rate was 2.8 percent, fourth in New England for that year. For the New England states, growth rates ranged from a low of 1.3% in New Hampshire to a high of 4.2% in Massachusetts. Should RI cheer about this? Are things at long last turning around here?

Before going much farther, let me reiterate my long-held view that state real GDP is quite possibly THE least accurate and most noisy statistic at the state level. But in spite of this, it is the primary "game in town." So, let's analyze the data for what it is (and isn't).

While it is very tempting to focus exclusively on the most recent data point here (the year 2010), that would be very misleading (literally short sighted), since where we are today is a function of past levels of state real GDP along with the rates of growth or decline we experienced in recent years. The problem for Rhode Island is those past rates of growth  -- actually decline during "The Great Recession."

Using actual values, Rhode Island was the only New England state to experience declining real GDP in 2007 (a fall of 1%), as its recession began in June of 2007 based on my Current Conditions Index. It then went on to record rather substantial declines over the next two years, 2% in 2008 and 1.8% in 2009. Remember: continuous declines exert cumulative effects on a state's economy. And, this makes it more difficult to return to where things were before the series of declines began.

In order to take the past directly into account and make it easier to visualize what happened over the entire 2007 - 2010 period (this is what the most recent data release focused on), I have expressed actual values relative to their values in 2007. So, the value for any state in a given year indicates that value as a percentage of that state's 2007 value. A chart of this, which includes a data table, is given below (click to enlarge):

Do I need to say which line represents Rhode Island? The red dotted line "bringing up the bottom" over the entire period is Rhode Island. Compared to the US overall, New England overall, and the six New England states individually, Rhode Island fell the farthest and has rebounded the least. Note that several of the New England states had returned to or exceeded their 2007 real GDP values by 2010, most notably Massachusetts (102.4%), Vermont (101.2%), and Connecticut (100.5%). New Hampshire and Maine were almost back to 2007 levels, with 99.5% and 99.2% levels, respectively. For Rhode Island, we have only managed to return back to 98.9%.

Make no mistake about it, there is no cause for celebration in these numbers. Contrast the unemployment rates of the other New England states with that of Rhode Island, and it is instantly apparent that Rhode Island's labor market is farther away from where it was and wants to be than anywhere else in New England. We don't fare much better for employment as well. Payroll employment in Rhode Island peaked well before either the US or any other New England state and it remains at very depressed levels to this day!

For all of the apologists who will view this and dismiss it based on the convenient label "being negative," let me offer another saying for Rhode Island they can use in their constant search for mediocrity: "Almost doesn't count except in horseshoes, bombing raids, and for the Rhode Island economy." Those far less neanderthal intellectually will instantly appreciate the fact that the only question that matters is whether this is analysis is accurate. If it is, and it is negative, then it would appear to be an appropriate time for our leaders to institute changes that make things better here. It's not as if we haven't had the opportunities to do this, especially during the global meltdown. As the saying goes, "A crisis is a terrible thing to waste." We wasted that crisis, a time that was perfect for Rhode Island to reinvent itself and to make it more competitive so it too could be benefiting from the recent upsurge in national growth. We can't change the past, but we can meaningfully alter the future. We appear to be running out of time to make things significantly better here. Now would be a good time for the efforts to begin!