Separating Fact from Fiction in Rhode Island's Labor Market Data

This is an article I wrote several weeks ago that the ProJo chose not to publish in its printed edition.
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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: Never Mind!

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 resident employment.

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.

Just When You Thought Things Here Couldn't Get Worse!!

In the prior few posts, I outlined how badly Rhode Island's payroll employment has been performing of late. In fact, in the last post I raised the possibility that Rhode Island might actually have entered a double-dip recession. While this is a distinct possibility, I am not necessarily willing to embrace that conclusion -- yet. In this post, I will show the recent behavior of the "other" kind of employment: resident employment.

What makes life interesting for persons like myself who follow Rhode Island's economy is that the two employment series are derived from different surveys.

Payroll employment comes from the Current Employment Survey (CES) for the near-term results, which are estimates of the far-more inclusive Establishment Survey. Synchronizing the results of these two surveys, which occurs with the new January data each year, is called rebenchmarking. Think of payroll employment as the number of jobs in Rhode Island, as these data are derived from surveys of employers in this state.

Resident employment is obtained from the Household Survey, which as its name implies, is a survey of Rhode Island residents obtained from individual households in this state. Values of this series too are often revised along with the new January data each year.

There are several critical differences between these data series. First, resident employment includes the number of employed Rhode Island residents, no matter where they work, whether in Rhode Island or in other places. In addition to this, resident employment includes self-employed individuals, a very critical factor to track when the state of Rhode Island's economy is changing. These two factors are capable of causing large and significant divergences between payroll and resident employment.

You saw the recent behavior of payroll employment in the prior posts. It has deteriorated during the last six months. What about the behavior of resident employment? The chart below (click to enlarge) shows Resident Employment for Rhode Island since 2009.

There are several amazing features of this chart. First, note that when the current recovery for Rhode Island began in June of 2010, resident employment was actually falling! The level of "support" for resident employment here is just above 500,000. Support held until June of 2011, when resident employment dropped below 500k. What had been support then became "resistance." Resident employment recently made a run at the new resistance line of 500k, but that attempt failed. It has now been declining for the past few months. One thing should be clear from this chat, however: resident employment in Rhode Island has been on a very well-defined downtrend throughout this entire recovery. Now that's very strange! I have always noted how idiosyncratic Rhode Island's economy is, but this is a new one even for me. Wait, though, a further look at the data in this chart produces a truly amazing graph: year-over-year changes in resident employment:

This would be a very strong chart if we were to turn it upside down. Unfortunately it has the correct orientation. The bright moments for Rhode Island, then, the relatively small number of green bars that indicate year-over-year increases, occurred during the May through November of 2010 period. I guess it is safe to say that for Rhode Island: "Those were the "good old days."

What this rather scary chart reveals is that the factor dominating changes in the household survey for a number of years now has been Rhode Island's declining population. Remember, our state's population has been shrinking consistently since July of 2004  -- yet another dubious distinction for Rhode Island. The pace of economic activity here has helped at times, as have job prospects for our residents in Connecticut and Massachusetts. However, I have to conclude that what this chart really illustrates is the set of major structural negatives and problems facing Rhode Island. At present, are we really the "masters of our own fate?" Even if we are, there are serious questions about how much longer that status would remain intact.

Has Rhode Island Entered Into A Double-Dip Recession?

I  have made several posts recently that deal with the rebenchmarked payroll employment data from a fairly long-term perspective. In this post, I will provide you with two charts that illustrate the shorter-term behavior of payroll employment for Rhode Island. These charts are very disturbing, illustrating that on a year-over-year basis (i.e., comparing a given month with the same month one year earlier), payroll employment here has either been declining or flat for six consecutive months. Is this the beginning of a recession? More about this below.

The first chart (click to enlarge), contains an alarming element: the magnitudes of the payroll employment declines have been worsening for the most recent two months of data, in spite of the fact that national economic activity has been improving.

The second chart (click to enlarge) shows the underlying basis of the chart above: job gains and job loss since 2009.

Note that the monthly employment change is the difference between job gain and job loss for each month, in spite of how this is reported by our local media. I find it very striking to see how much job loss here has declined since 2009. Sadly, job gain hasn't done much since the first part of 2010. And, over the past year, job loss appears to be accelerating at the same time that job gains are dissipating.

To some, the information in these charts might be enough to make a recession call -- that Rhode Island had indeed entered into the second "dip" of a double dip recession. I am not quite ready to make that call just yet. A recession or recovery call should be predicated on the behavior of a broadly based set of economic indicators, not just a single indicator, even one as important as payroll employment. This, of course, is what my Current Conditions Index (CCI) was designed to do. Based on the behavior of the CCI, I have to conclude that it is premature to say that Rhode Island has entered into a recession at this time. But it is safe to say that Rhode Island's economy is hanging on by its finger nails!

For anyone who thinks that the austerity engaged in by Rhode Island's cities and towns has not had a negative impact on Rhode Island's economy, guess again. It is one of the more critical elements of Rhode Island's most recent malaise. Of course, let's not forget the fact that Rhode Island's tax and cost structure continues to be highly non-competitive, driven in large part by the lack of skills of our state's labor force (for those who decide to stay in-state, at least). Apparently those two elements have been more than sufficient to offset the beneficial effects of the improving national economy on the economy of Rhode Island. Sadly, austerity here will continue, as will the non-competitiveness of our state's tax and cost structure. Has Rhode Island become immune to national growth for the next few years? I sure hope not. But we'll have to wait and see.

Next Post: How is resident employment, the "other" employment measure for Rhode Island, performing? Surely, it can't be doing as badly as payroll employment, can it? Or can it?

Retail Sales in Rhode Island Since the Last Recession

One of the most critical elements that determines Rhode Island's economic momentum is retail sales. Retail sales drives a great deal of economic activity here while itself being determined by how well the overall economy does. Remember, too, that sales tax revenue is an important source of Rhode Island's overall tax revenue.

Retail sales have done better since Rhode Island emerged from its last recession in February of 2010. But, like so many other economic measures, its behavior during this recovery has been choppy at best, reflective of the fact that our state's rate of growth has recently begun to slow.

The best way to analyze retail sales is to take inflation into account. Doing this we obtain real (i.e., inflation-adjusted) retail sales. I have calculated these so that the most recent month of data, April 2011, is the base period (the basis for comparison). The chart below shows real retail sales for Rhode Island since 2007 (click to enlarge).

The most striking feature of the performance of retail sales since 2007 is how far they fell. A quick look at the graph also shows rather disturbing trends not only in their rate of decline but the duration over which their decline occurred. All of this is a testament to how severe the last recession was. It wasn't given the name "The Great Recession" for nothing! From this chart, it should also be fairly easy to grasp one of the reasons why tax revenue here declined during the last recession and has only recovered a bit during this recovery.

During the last recession, real retail sales moved into a downtrend in June of 2007 that lasted for over three years. The "breakout" from this prolonged downtrend, which coincided exactly with the beginning of Rhode Island's current recovery, occurred in February of 2010. 

In more "normal" times (I have forgotten what those actually are by this point), we would have seen a fairly rapid rebound from such a precipitous decline in retail sales. But in those times "leverage" was rampant as credit, whether credit cards or home equity lines of credit, were used without a second thought, banks were very generous in their lending, mediocre credit scores weren't much of an impediment, and collateral was something that persons had to have back in the dark ages. But that was then. The chart above shows now -- not a very substantial recovery in real retail sales. After an initial jump, real retail sales began to fluctuate, largely sideways but trending slightly downwards, meaning that the value of retail sales has barely kept up with inflation. The same has been true for manufacturing wages here (see previous blog post on this). The recent slight downtrend also illustrates that the pace of economic activity in Rhode Island has been slowing of late.

Will real retail sales here break out from the most recent downtrend? Several factors could allow this to occur, namely low interest rates and ongoing national and state recoveries. However, the low and declining interest rates themselves reflect a slowing in the pace of national economic activity. Add budget problems in RI (sorry to be redundant) and for the US, and pension woes that must be addressed, and it becomes apparent that it is largely the underlying cyclical momentum of the US and Rhode Island economies that will largely determine whether a breakout occurs. Should these factors fail, our state faces the prospect of a breakdown below the recent trend, potentially eliminating some or much of the relatively small recovery gains we have experienced over the last year. Should that occur, revenue "surprises" will quickly become disappointments. Let's keep our fingers crossed that this is not what occurs. We already have enough on our state's plate as it is!

With Recession Over, What's Next?

Now that the US recession has officially been declared as being over, the most obvious and pressing question is where we go from here?

As there are confusions about what a recession or recovery actually means (see the previous post), there are just as many confusions concerning whether we are actually in a recovery or a recession. I have provided a chart that will help to illustrate this point (click the chart to enlarge it).

I think it is safe to say that generally, most people refuse to believe the pronouncements of economists concerning when an economy is in the very early stages of either recession or recovery. Consider early recession in the chart. Note that the economy is not very far from its peak in economic activity. So, when economic data are released, the numbers are still very good in a historical context. In fact, unless you focus on what economists refer to as leading economic indicators, the numbers will show an economy that is still climbing the activity "hill" (i.e., to the left of the peak), making it even more difficult to assess what is actually taking place. Perhaps the best example of this is the one measure the general population focuses on most -- the unemployment rate. This is a lagging indicator, meaning its level at present reflects what happened in months past. Remember: a recession is NOT defined as a level of diminished economic activity. As the National Bureau of Economic Research (the "dating" body for economic cycles) points out, it is instead a period of diminishing activity. This highlights the distinction between levels and rates of change that I discussed in the previous post.

Right now, nationally at least, we find ourselves in the early stages of a recovery. Once again, look at the chart above. In the early stages of a recovery, an economy is close to the "bottom" of economic activity. The numbers that are released are therefore not going to be very good, and after a recession period, often discouraging. Of course, if you focus on lagging indicators, you will almost certainly conclude that we are still in a recession.

At this point, I need to reiterate that contrary to popular "wisdom," being in a recovery does not necessarily require a return to "normal" times and historical averages (or above) of economic variables. It might. But generally it takes some time to get back to "typical" levels. The next chart will help to explain this.

As this chart should illustrate, not all recoveries are alike. Each path reflects how rapidly economic activity will be rising in the future. Historically, when there is a very deep national recession like the one we just had, the economy rebounds quickly. This leads to a "V" shaped recovery (the green line). It doesn't take all that long to return to "normal" levels of economic activity. In that situation, a recovery feels like a recovery.

But recovery paths are different since not all recessions are the same. Global recessions occur over longer periods and are generally more damaging than more "typical" recessions. When there is a global recession with major financial problems, as the one we just had, the pace of recovery tends to be slow and it takes a longer time to return to "normal" levels of economic activity (the red line). Consider that at present, individuals are spending less, saving, and paying down debt. Banks have lowered leverage. All of this is very positive in the medium to longer term, but it extracts a cost on the rate of economic growth in the short term. Add to this  the fact that banks aren't lending as much as they might have in previous recoveries, and you get what Mohammed El-Erian of Pimco refers to as "The New Normal" (click here for a video of El-Erian explaining this concept). He and I are somewhat concerned with the possibility of deflation in the near-term as well.

So, where does all of this leave us? What are you to think? Hopefully you are now more aware of  the basics of what is really going on, what an early recovery means, and the possible paths the US economy might take. THE question is which path will be the one our economy follows. Let me be very honest about this: economists, including me, don't really know the answer to this, in spite of all our forecasts and predictions. In this context, let me state one of my favorite sayings: CERTAINTY IS AN ILLUSION. Any forecast, no matter who makes it, is essentially a scenario. It assumes what the areas are that will be the most important over the forecast period, how each of those areas will actually change, and the interactions between and among them. Obviously, there are numerous sources of potential error.

In a period of such uncertainty, where things seldom appear to be what they actually are, many persons are all too willing to step forward with their "solutions." While these might sound good, or appeal to the increasingly subjective notion of "common sense," they too are based on scenarios. So, they might be right. Or, they might be wrong. Let me recommend that you critique any or all of these within the context of one of my favorite sayings: "Complex problems have simple, easy to understand, wrong answers."

Let me finish by acknowledging that at this point you are no doubt wondering where I stand on the future path of economic growth. I will outline this in the coming days (it's time for me to get to class). Before doing that, I need to apply the information in these last two posts to what is occurring in Rhode Island. Stay tuned!

Welcome to this Blog!

This is the first of what promises to be many posts to this newly created blog that will detail my views about economics and the Rhode Island economy using the tools of the internet. Unlike what I have been able to provide to the local newspapers over the years, this blog will include graphs, tables, videos, and other media-relevant tools that will allow me to communicate in a far more visual way than I could ever do in newspaper articles. Those who have come to my presentations over the years will already be familiar with the types of tables and graphs I will provide here. But, unlike what I am able to say to the local media, I will come far closer to stating what I really think in this Blog. The stakes now are far too high for us to sustain the way things are being done here.

Through time, I will publish articles that what I would have submitted as Op-Ed pieces to local newspapers in this blog. At times, posts might consist only of questions that need to be discussed and answered by others in this state. Let me state that I fully intend to provide realistic analyses of where Rhode Island's economy is and where it is headed, as I have done for years.

To a number of our state's "leaders" over the years, my efforts to do this have always been viewed as "being negative." But if we don't critically and honestly evaluate both the strengths and weaknesses of our state's economy, how can we realistically expect to make it better and stronger, able to move forward competitively? We didn't do this over the last decade, especially when we finally got back on our feet in the late 1990s when we had a clear window of opportunity (see my article from 1999  and the report card I proposed that our legislators use). The result was that we were "flat footed" during the worst recession this state has faced since 1991!

It is reasonable to ascertain that the persons who have labelled me as being negative are the image of what this state defines as being "positive." If impeding efforts to make this state more competitive in the future when we had a chance to do so, then abandoning the people of this state during its worst economic crisis in twenty years is Rhode Island's definition of "positive," then please do label me as "negative."

Consistent with using internet tools, let me present two graphs that scared the hell out of me from the moment I first created them (click to enlarge them). I knew things had been very bad here, but never this comparatively bad. I generated these while writing an article about Rhode Island's high unemployment rate for a Boston Federal Reserve Publication. If I had to name these, the first would be CAUSE, the second EFFECT.

I hope you are as mad and upset about what these graphs show as I am. They get my vote as being a functional definition of a state that is an economic "basket case." Remember, it never had to be this bad here. The failure of collective economic leadership in this state over the last decade is what made Rhode Island so vulnerable to national and global economic weakness. Existing structural problems, the manifestations of which are listed below, allowed our state to move from its usual doldrums into "afterburners." Consider the following "stylized facts:"

• Rhode Island was one of the first states to experience persistent budget deficits;
• Rhode Island's employment peaked in January of 2007, almost a year before the national employment peak;
• Rhode Island's economy went into recession in June of 2007 (based on my Current Conditions Index), six months before the US recession began; and
• Rhode Island was losing population consistently since July of 2004 when it moved into recession.

Rhode Island's current problems therefore have a very large structural component. Don't let any state politician tell you otherwise. If one of them tries to say this, or their new favorite: "We're all in the same boat,"confront them with the reality that we are indeed different in a number of fundamental ways from other states.

Let me end my first blog post with the way I view the "positive" people among those who run our state. Anyone currently in office who says that you should always view the glass as being half full is expendable. Any non-incumbent who utters this should be considered irrelevant.