Current Conditions Index Report: November 2011

This is an abbreviated version of the November Current Conditions Index report. For the complete version, which includes a table with individual indicator performance for this month along with historical reports in PDF format, please visit my web site: http://www.llardaro.com . This report was covered by the local media. The Providence Business News did a very nice job with its story, as did GoLocalProv. Today, I also appeared on Channel 10. Here is a video of my appearance.

Rhode Island’s economy finally showed a spark of life in November, as it was able to break out of the neutral range it had been stuck in since May. The Current Conditions Index rose to 67 in November, its highest value since February, as eight of twelve indicators improved.

While this month’s reading may be a signal that Rhode Island’s economy has finally moved to a sustainable higher level of economic activity, I believe it is still too early to make that call. Why? As I have stated numerous times over the years, in tracking the overall performance of Rhode Island’s economy, there are always groups of positive and negative forces interacting. Whichever of these dominates ultimately determines the overall direction our state’s economy takes. Suffice it to say that there was a great deal of such interaction in November.

Even though the November CCI showed a substantial improvement, it still lagged behind its value of 75 last November. The Current Conditions Index has now failed to match or exceed its year-earlier value for nine consecutive months. Perhaps more importantly, a critical indicator of Rhode Island’s performance, Retail Sales, did manage to improve again on a yearly basis (+1.8%) while declining for a third consecutive time in terms of monthly change. This raises the obvious question of the sustainability of late-2011 levels of Retail Sales as we move into 2012. Yet Retail Sales was able to register these recent annual gains in spite of declining US Consumer Sentiment. Furthermore, on a monthly basis, US Consumer Sentiment has now improved for three consecutive months. It will be interesting to see how this interaction plays out, especially since personal income for Rhode Island actually declined in Q3.

One other indicator, the Labor Force, has continued to perform very badly on a yearly basis, as it has now failed to improve every month since February. But it too has begun to improve on a monthly basis, and along with this monthly improvement has come higher levels of resident employment, a very positive sign, and a falling Unemployment Rate.

Two indicators that failed to improve in October showed improvement in November. The first of these is Single-Unit Permits, which reflects new home construction, and is perhaps the most volatile of the CCI indicators. Based on the volatility of this indicator, this month’s improvement cannot be viewed a signal that new home construction has bottomed. The other is Total Manufacturing Hours, a mainstay of this recovery, which barely increased (0.6%), but did reverse last month’s decline.

Of the remaining indicators, Employment Service Jobs, a leading labor market indicator that includes “temps,” rose by 0.3 percent, only its second improvement since February. This indicator may well have bottomed. Private Service-Producing Employment continued to grow, albeit slowly (+0.2%). Not surprisingly, Government Employment fell once again in November (-2.3%), while New Claims, a leading labor market indicator that indicates layoffs, rose by 0.2 percent, its fifth consecutive failure to improve. Are layoffs trending higher?

The Manufacturing Wage surged by 17 percent in November to $17.38, if anyone actually believes this, following several double-digit increases in prior months. Finally, Benefit Exhaustions continued its trend of improvements, falling by 27.3 percent.

The Long View of New Home Construction in Rhode Island

New home construction has always been a critical part of Rhode Island's economy. It's not hard to see why that is the case. The economic effects of housing are very substantial, as there are the both the direct effects of the actual building, not the least of which concern job gains, along with secondary and tertiary effects dealing with further additions to employment along with the retail sales of appliances, furniture, carpets, etc. Anyone who examines the behavior of retail sales must consider the relative strength of housing, as these are strongly and positively correlated. Furthermore, new home construction is highly cyclical, meaning that it fluctuates more than does the overall economy.

Once upon a time, new home construction in Rhode Island was very strong, as it provided our economy with major boosts, both when recessions ended and as recoveries progressed. Of course, there was always a downside as well: during recessions, new home construction would fall substantially, exacerbating economic woes as economic activity deteriorated based on the direct and indirect effects involved.

How good were "the good old days?" How do those days of old compare to what we have seen the last few years? A picture is worth a thousand words here. The graph below shows Single-Unit Permits (i.e., new one-family homes) in Rhode Island since the 1980s (click to enlarge). Think of this as new home construction in Rhode Island.

Note the rapid and large rise in new home construction during the first part of the 1980s, moving from around 1,600 annual units in 1980 through a peak period of about 5,000 annual units during the 1985-1987 period. Look at that as long as you want -- we will never see the likes of that again here! In order to have such strong housing momentum, it is necessary to have two key ingredients that have been conspicuously absent here of late -- a rising population and substantial job creation.

You can see that the long-term decline in new home construction in Rhode Island began around 1987, the year of a major stock market crash and the last year during which Rhode Island was a manufacturing-based economy (a link to my web site on this). New home construction then began a precipitous fall from around 5,000 annual units all the way down to 2,000 annual units. As bad as that was, at least Rhode Island stabilized at that now-lower level for many years, through the very end of the last millennium.

What I find very striking about this history is how it is accurate to gauge Rhode Island's new home construction as "stepping down" since 1990. Note the trendlines in the chart above. Not only are these all downward sloping, their steepness continues to increase through time. Should that be surprising, given that Rhode Island is the only state for which population has been continually declining since July of 2004, the effects of which are clearly reflected in this chart?

During the depths of "The Great Recession," Single-Unit Permits here fell to as low as 33 units on a monthly basis, or 396 annual units. As I write this, the November 2011 value was 53 monthly permits, which translates to 636 annual units. So, it's not difficult to imagine that things can't get worse than what they are now.

What can we expect to happen when the US housing market at long last begins to improve? While you might think this should propel new home construction here back toward the 2,000 annual unit level, I don't see how this can actually occur. What would be our engines for such growth? I don't see our population ending its disturbingly long decline. And, given the lack of skills of our state's labor force, where would the jobs that would be suitable for all those persons with inadequate skills come from?

To repeat a quote from the Addams Family movies applied to Rhode Island: "Be scared, be very scared." Why? Because when the national housing market improves, it will be much easier for skilled Rhode Islanders to sell their homes here and move to states and regions that have far more favorable employment (and earnings) prospects. That, of course, will further exacerbate the skills deficiencies of Rhode Island's labor force. Even worse, Rhode Island will find itself losing persons who pay substantial taxes and who tend to not rely much on government services. That, of course, holds the potential to prolong and very possibly exacerbate Rhode Island's fiscal woes in coming years. Three guesses what the implications of those changes are for Rhode Island's housing market in coming years?

Current Conditions Index Report: October 2011

This is an abbreviated version of the October Current Conditions Index report. For the tables, historical reports, and more information, please visit my web site: http://www.llardaro.com . I made my monthly appearance on Channel 10 this morning. Here is a link to that interview. And, as always, the CCI received excellent coverage in both the Providence Business News and GoLocalProv.com.


The fourth quarter began in much the same way the third quarter ended — with the Current Conditions Index remaining at its neutral value of 50, as only six of the twelve CCI indicators improved in October. More disturbingly, October marked the eighth consecutive month for which the CCI failed to beat its year-earlier value. However, while Rhode Island’s economy might still be “dead in the water,” a favorable tide capable of helping us gain future momentum might be emerging.

Not all neutral CCI values are the same. If you have followed my analysis of Rhode Island’s economy over the years, hopefully you have come to understand that for other than the very best or very worst of times, groups of positive and negative forces are constantly interacting. Whichever of these dominates ultimately determines the overall direction the economy takes. In light of this, you should view October’s CCI reading as indicating that on average, compared to a year ago, Rhode Island’s economy was neither expanding nor contracting. When we look “under the hood” at individual indicator performances and trends, however, not necessarily restricting “comps” to one year ago, a somewhat more optimistic picture emerges: for October, seven CCI indicators were either flat or improved on a monthly basis. And, a number of those point to the likelihood that our ultimate breakout from the neutral range may well be to the upside. Remember, year-over-year improvement ultimately begins with favorable changes on a monthly basis.

So, in spite of a bland overall performance, October’s data reveal possibly building momentum. Key to this is the performance of three variables. Retail Sales rose by 4.7 percent in October, its fourth improvement in the last five months, in spite of the continuing deterioration in US Consumer Sentiment, which fell by 9.9 percent. Sustained improvement in this indicator will be a clear signal that Rhode Island’s economy is improving. Employment Service Jobs, a leading labor market indicator that includes “temps,” rose by 2.5 percent, its first improvement since February. And, while our state’s Unemployment Rate fell to 10.4 percent in October, its monthly decline is more credible than recent decreases, as this occurred with the Labor Force rising for the month (of course it continued to decline on a year-over-year basis). Even Private Service-Producing Employment, which continues to grow more slowly, was not largely offset by further declines in Government Employment (-2.0%) this month. Has Government Employment here bottomed around 60,000? That will remain to be seen.

Among the disappointments were: Total Manufacturing Hours, a mainstay of this recovery, which declined for the first time in almost a year and a half (-1.2%); Single-Unit Permits, which reflects new home construction, and perhaps the most volatile of the CCI indicators, declined by 23.1 percent in October, reflecting the reality that little or no new home construction is taking place in Rhode Island; and New Claims, a leading labor market indicator that indicates layoffs, which rose by 3.2 percent, its fourth consecutive failure to improve. If layoffs have now begun to trend higher, this will offset some future economic momentum and mitigate potential gains from Employment Service Jobs.

Finally, the Manufacturing Wage surged by 17.6 percent in October, on top of increases of 16.3 percent for September, 14.6 percent in August, and “only” 12.7 percent in July, while Benefit Exhaustions improved again but at a slower rate (-5.7%).


The Bottom Line:

While Rhode Island’s economy remains stuck in neutral overall, October’s data contain some basis for believing that things might  begin to improve in the future. The critical indicator to watch is  Retail Sales. Overall, though, we must abide by the most basic rule of data analysis: never make too much out of a single month’s data.    Data revisions, especially for labor, could alter this emerging optimism, as October through December employment values are historically those most likely to be changed through rebenchmarking.

Word Cloud

At this point, I have published a fairly large number of posts. If you want to see the words that have appeared most frequently, below is a word cloud of this blog up to now (click to enlarge).

That Sinking Feeling

If you have been following what I have been saying about the performance of the Rhode Island economy over the last year, you know that things here have been deteriorating. Rhode Island has been in a recovery since February of 2010. Throughout 2010, the pace of economic activity here was substantial (relative, of course, to where we had been in "The Great Recession."). But since March of this year, my Current Conditions Index (CCI) has failed to match or exceed its year-earlier value. This, of course, indicates that the pace of economic activity here has slowed. In fact, based on this recent inability to match or exceed year-earlier values and that the CCI averaged its neutral value of 50 over the third quarter of this year, I characterized Rhode Island's economy as being "dead in the water."

Another way to see visualize this is with a graph of the CCI's values by month over the last three years (click to enlarge). I don't think I need to add much discussion to this chart, a picture like this is worth a thousand words, as the old saying goes.

So, at the present time, 2010 appears to be "the good old days." As we contrast last year with what is occurring now, it seems inevitable to get a sinking feeling.

Current Conditions Index Report: September 2011

This is an abbreviated version of the September Current Conditions Index report. For the tables, historical reports, and more information, please visit my web site: http://www.llardaro.com . I made my monthly appearance on Channel 10 this morning. Here is a link to that interview. And, as always, the CCI received excellent coverage in both the Providence Business News and GoLocalProv.com.


The third quarter ended with a whimper, as the Current Conditions Index for September rose back to its neutral value of 50, as only six of the twelve CCI indicators improved. While that’s hardly cause for celebration, at least September’s CCI was better than the contractionary reading of 42 for August.

For the entire third quarter, the CCI averaged 50 — flat economic activity. Perhaps more disturbing is the fact that September marked the seventh consecutive month for which the CCI failed to meet or exceed its year-earlier value. At this point, I think it is safe to conclude that Rhode Island is no longer near stall speed, the conclusion I reached in last month’s report: we are now pretty much “dead in the water.” Yet in spite of this lack of positive momentum, I remain unconvinced that Rhode Island’s economy has actually entered a period of contraction. In other words, as bad as the data are, I do not believe that Rhode Island has  fallen into a recession at the present time. However, I have now upgraded my assessment of the likelihood that Rhode Island falls into a recession this fiscal year from 50 to 60 percent.

September’s data reveal yet another very weak economic performance. Not only did half of the CCI indicators fail to improve, several of the improving indicators displayed a continued  loss of momentum. Worse yet, two of the improving indicators  should be viewed with  extreme skepticism. First for the bizarre.

The Manufacturing Wage surged by 16.3 percent in September, on top of increases of 14.7 percent in August and 12.7 percent in July. Rhode Island’s Manufacturing Wage had been at levels around a decade behind the US average. At this pace, that gap should be entirely eliminated by the end of this year! Our state’s Unemployment Rate fell to 10.5 percent in September, in spite of declines in both payroll and resident employment. This was in large part due to yet another decline in  our state’s Labor Force. View this jobless change with a rather large “grain of salt.”

Among the remaining indicators that improved, Private Service-Producing Employment, while still growing, continued to grow more slowly, falling below one percent growth this month. Unfortunately, much of the benefit from even this slower change was offset by yet another sharp decline in Government Employment (-2.8%). The questions concerning this indicator are when and at what level will it ultimately stabilize? Total Manufacturing Hours, a mainstay of this recovery was effectively flat in September, rising by 0.02 percent. Still, this indicator has risen, albeit at ever-decreasing rates for fifteen consecutive months. Retail Sales surged by 17.2 percent in September, its third improvement in the last four months, in spite of the continuing deterioration in US Consumer Sentiment, which fell again at a double-digit rate (-12.7%). Finally, Benefit Exhaustions, a reflection of longer-term unemployment, improved again, but at a slower rate (-9.1%).

Among the remaining indicators, Employment Service Jobs, a leading labor market indicator, fell by 2.1 percent in September, although its level may well have bottomed. Single-Unit Permits, which reflects new home construction, declined by 16.7 percent in September, after two months of improvement. Clearly, new home construction here remains at very depressed levels. Finally, New Claims, a leading labor market indicator that indicates layoffs, rose by 29.7 percent, its third consecutive failure to improve. We may well have moved into a period of rising layoffs, a trend that could seriously undermine our future economic momentum.

A Chart of the Future Direction of Rhode Island's Economy

It has been abundantly clear from the performance of my Current Conditions Index over the past several months that Rhode Island's economy has continued to slow. As of the most recent report (August 2011), I reported that Rhode Island is essentially at "stall speed."

To understand what is actually happening at the present time, we need to revisit what occurred during the last recession. As that recession continued, the levels of many key economic indicators became so beaten down that they ultimately couldn't fall much further. So, the seeds for the present recovery began to emerge as our state's economy began to decline at slower and slower rates. I wish I could say that this was related largely to Rhode Island's leaders reinventing our state's economy and eliminating most of the structural weaknesses that continue to haunt us to this day. But, this is Rhode Island. The operating procedure of our state's leaders then, which continues to this day, can be summed up with a single word: Mañana.

Our long recession finally ended and economic growth returned around February of 2010, which is the date I place on the beginning of this recovery. As I have discussed in previous posts, this did not then, nor does it mean now, that we have returned to "normal" activity levels. What actually occurred is that the greatly diminished levels of many key variables eventually became relatively easy to beat. So, we finally began to beat these weak "comps," and we improved from there. Our rate of growth thus became positive, and for the remainder of 2010, Rhode Island's economy performed fairly well, certainly far better than it had in the prior three years!

What we are witnessing now is the "second act" of this play. We were able to handily beat the weak comps throughout 2010, but for this recovery to continue, we have to beat ever-improving comps through time. For this to occur, our rate of economic growth must be sustained or even accelerate, and the breadth of overall economic activity must expand.

As my Current Conditions Index shows, CCI values for 2011 have lagged the corresponding levels for the prior year since March. Thus, our economy's rate of growth has continued to moderate. Given the values for July and August, there is even some question in my mind as to whether there is much growth at all.

An excellent way to see the manifestations of the above discussion is to view Retail Sales for Rhode Island. As I have done on other occasions, I converted this to its real (inflation-adjusted) value, since Retail Sales is in current dollars, and its behavior can be distorted by inflation. The chart below shows this since 2007 (click to enlarge):

The first thing that should jump out at you is how far real Retail Sales today are below their peak in mid-2007. This is not unique to Rhode Island -- the levels of many variables today remain far below what they once were in the "good old days" of leverage and debt accumulation. Focusing on the present recovery (the blue shaded area), real Retail Sales have been largely range bound, displaying lower highs throughout this entire recovery, with a floor (or "support") around the $11.6 billion level.

It is this indicator, Real Retail Sales, that can serve as the proverbial "parakeet in the coal mine" with respect to the future (cyclical) direction of Rhode Island's economy. Based on the way this indicator has behaved throughout this recovery, there will either be a breakout above the red line (resistance) or a breakdown below the green line (support) in the coming months.

A breakout, which is what we should all be hoping for, will indicate that the present recovery is continuing. For this to occur, it will be necessary for employment to continue rising, which at the present time means that it returns to an uptrend. Along with this, tax revenue would continue to provide us with pleasant surprises, helping us moderate budget deficits.

A breakdown, the dreaded outcome, would reflect that our state's economy is unable to sustain its current growth and breadth of activity, meaning that we are headed into a double-dip recession. This would be accompanied by falling employment, increasing unemployment, declining tax revenue, and a rising budget deficit. The actions required to restore budget balance would inevitably further slow the pace of economic activity.

So, the ultimate question is which way is Rhode Island headed? Had our leaders used the past crisis ("The Great Recession") to reinvent our state's economy, making it more competitive with greater exposure to growth-oriented sectors, the most likely outcome for us would have been a breakout above with continued recovery. While a crisis is a terrible thing to waste, the inaction of our state's leaders, guided by their primary leadership principle -- Mañana, means that Rhode Island wasted the opportunity afforded it during the last recession to make meaningful structural changes to our state's economy. We once again find ourselves "flat footed," largely at the mercy of national and global economic momentum.

Ironically, the world has changed -- national economic momentum is largely influenced by global trends, especially what is occurring in Europe. So, even the US is no longer the master of its own fate. The real question for us thus becomes exactly what is it that Rhode Island is the master of?

More Evidence of a Flat Economy

One of the more important indicators of Rhode Island's economic performance is income tax withholding. Part of the reason for its importance is that it is not a survey-based indicator, so we don't have to worry about the possibility of survey error and subsequent revision. Furthermore, income tax withholding is real-time data. But it is not what economists refer to as a "leading economic indicator," which is the best type of indicator to use when attempting to predict the future. To the contrary, income tax withholding is a "lagging indicator" which reflects economic activity in past months.

In using income tax withholding as the basis for attempting to understanding Rhode Island's current economic performance, three things must be taken into account. First, income tax withholding is a nominal value, meaning that it does not take inflation into account. Therefore, inflation can distort this indicator, making its performance appear to be better than it really is. Second, there are seasonal variations in the amount of withholding collected throughout the year. To account for this, it is necessary to perform seasonal adjustment. After both of these adjustments have been made, it is possible to meaningfully compare any particular month to any other month. The result, after both of these corrections have been made, is called seasonally adjusted real income tax withholding. To simplify this and what follows, I will simply refer to it as real withholding. Finally, it is critical to remember that, as stated above, withholding is a lagging economic indicator.

First, let's take a look at income tax withholding using seasonal adjustment, but not adjusting for inflation. The chart below shows this (click to enlarge). Its performance of late looks very impressive. Someone using this chart as the basis for determining how well Rhode Island's economy is performing would almost certainly give a very positive vote -- the line of late is clearly sloping upward with a respectable slope.

Now for a more detailed look -- place the above chart in the context of the longer-term trend in withholding, as shown in the next chart (click to enlarge):

While the recent trend still seems promising, in a longer-term context it is apparent that since 2008, income tax withholding in Rhode Island has remained below its longer-term trend. But can't that just be evidence that this recovery has been relatively slow compared to past recoveries? The answer is yes it can. But since neither of the above charts takes inflation into account, we need to view real income tax withholding before making any final determination on current economic performance based on withholding.

The final chart takes inflation into account, showing real income tax withholding (click to enlarge). I have made the base period the purchasing power of September of 2011 (the most recently available data). Notice how real withholding has failed to break above its recent highs of around $75 million, and that it has remained range bound between $70 and $75 million throughout this entire recovery. I labelled these as "support" and "resistance," respectively, terminology from the technical analysis of markets. So, it is not in any way a stretch to state that during this entire recovery, Rhode Island's real income tax revenue has displayed a flat (horizontal) trend. So, while current dollar income tax withholding has been rising, as the above two charts show, its relatively static real value reflects the fact that current dollar growth has only matched, and failed to exceed, the rate of inflation.

However, that's not necessarily bad news. State budgets are run based on nominal values, and nominal withholding growth appears to be strong up to this point. And therein lies the true caveat: what happens from this time forward?


The answer to this question cannot be adequately determined based solely on the past behavior of any single indicator like income tax withholding, whether nominal or real values are considered. As I have indicated numerous times on this Blog, it is necessary to "hedge" one's bets by using a set of indicators to arrive at a far more educated answer to this question. And that is precisely why I formulated and publish my Current Conditions Index each month (http://www.llardaro.com/current.htm ).

The CCI value for August indicated a contraction value (of 42). If we were to observe a string of several consecutive contraction values, it would then be appropriate to conclude that Rhode Island would indeed have begun a double-dip recession. But we are not there yet. And at this point, I am not willing to make that call.

Current Conditions Index: August 2011

This is an abbreviated version of the August Current Conditions Index report. For the tables, historical reports, and more information, please visit my web site: http://www.llardaro.com . I made my monthly appearance on Channel 10 this morning. Here is a link to that interview. And, as always, the CCI received excellent coverage in both the Providence Business News and GoLocalProv.com , while as of the time I am writing this post, the ProJo has yet to even mention it.

So much for a potentially strong start to the third quarter! While the Current Conditions Index originally registered a jump to 67 in July from 58 in June, updated data caused July’s value to be revised down to 58 based on New Claims, which moved from a slight decrease (improvement) to a small increase. What could possibly be worse? August’s CCI value fell all the way to 42, a contraction range reading, as only five of the twelve CCI indicators improved this month. Note that this contraction reading occurred only three months after the neutral reading (of 50) for May. Taken together, these recent CCI values reaffirm what I have been saying for a while now: Rhode Island’s economy has definitely slowed over the past several months. In fact, the set of 2011 CCI values up to this  point are trending lower, as we are have witnessed lower highs and lower lows. However, this does not indicate that Rhode Island has entered a recession. It is never advisable to make too much of a single month’s data. Were Rhode Island in recession, we would have observed six or more consecutive contraction readings. So, while I continue to believe that there is a 50 percent chance of a recession for Rhode Island this fiscal year, I do not believe we are in a recession at the present time. But the bizarre labor market data for August certainly make this pronouncement considerably more difficult.

It's Not Supposed to Be Like This!

Pardon the fact that I have not posted anything for a while, I switched from Cox Cable to FiOS (ready my post about issues I was having) and had to make all the required changes associated with this. Please note that my web site has now been moved to http://www.llardaro.com .

As sooooo many people here continue to summarize Rhode Island's overall economic performance by the recent behavior of its unemployment rate, the collective grasp of how well our state's economy is actually performing continues to slip farther and farther away from reality. 

Recent gains in payroll employment here, which have at times appeared to defy gravity, seem to contradict any hint of weakness, reinforcing the declining unemployment reflects economic strength view. You might think that these large monthly employment gains have been a potential source of confusion to me, as my Current Conditions Index has continued to show a slowing pace of economic activity in Rhode Island. But as of 2011, I have been following Rhode Island's economy for twenty years. Suffice it to say that along the way I have observed and come to know all too many patterns and data combinations that reflect the idiosyncrasies of Rhode Island's economy.

But one doesn't need all this experience to know that it is always preferable to focus on a set of indicators, not any one single variable, to gain an accurate picture of Rhode Island's economic performance. That, of course, was the basis for my creating the Current Conditions Index. And even for a single indicator like payroll employment, there are often several related measures worthy of observation. 

As I have discussed in prior posts, there are two measures of overall employment for Rhode Island. The first, which I have been alluding to above, is payroll employment, the number of jobs in Rhode Island. The second is resident employment, the number of Rhode Islander residents who are working, irrespective of whether this occurs in or outside of Rhode Island. One major difference between these is the inclusion of self-employed persons in resident employment. And that difference matters a great deal in the early stages of recoveries or at turning points for the economy. 

The chart below shows the recent behavior for both employment measures here (click to enlarge):

Note that the year-over-year rate of growth for resident employment peaked before the end of 2010 and has continued to decline, becoming ever-more negative, as 2011 progressed. For payroll employment there is a very different story: after moving to a positive rate of growth in the beginning of 2011, growth continued to accelerate through June. For July there was a modest slowing in growth, before plummeting to an almost 0% growth rate in August. So, was employment here really rising or falling recently?

RESULT #1: Regarding the recent behavior of payroll employment: POSITIVE MEASUREMENT ERROR COMETH BEFORE THE FALL. 

The dramatic-appearing run up in payroll employment should therefore be viewed as spurious, overstating payroll strength. In August, think of payroll employment figure as a "burp," expelling the measurement error that had accumulated in prior months.

Next, let's link the recent declines in Rhode Island's unemployment rate to changes in employment -- but the employment measure that is in the same survey it is -- the household survey (click to enlarge):

Shouldn't the unemployment rate only fall when employment is rising? While that certainly sounds reasonable and intuitive, it is not necessarily true. First, which measure of employment is this referring to? Second, since the beginning of 2011, Rhode Island's unemployment rate has been declining along with its resident employment. 

RESULT #2: THE UNEMPLOYMENT RATE CAN DECLINE EVEN WHEN RESIDENT EMPLOYMENT IS FALLING.

Obviously, there must be another force at work for this to occur, one that is obviously not intuitive. That force is the behavior of our state's labor force, as the next graph shows (click to enlarge):

Rhode Island's labor force has been declining since early 2011, along with both resident employment and the number of unemployed. The fact that the number of unemployed has been declining, even though resident employment has also been falling, is what lies at the heart of the explanation of this strange seeming combination of changes.

The math of August's numbers can be obtained from the following table (data in thousands) (click to enlarge):

Compared to last August, the number of unemployed Rhode Islanders fell by 7,000. That's the good news. But while this was occurring, Rhode Island's labor force declined by 15,200, and its resident employment dropped by 8,200. The trick to understanding this is knowing how the ultimate change in the unemployment rate is determined: the percentage change in the unemployment rate (-7.8%) is approximately equal to the difference between the percentage changes in the number of unemployed (-10.5%) and the labor force (-2.6%).  To simplify this a bit: even though the number of employed Rhode Island residents declined compared to a year ago, in percentage terms, the fall in the number of unemployed was greater than the decline in the labor force. Also, note that while the fall in resident employment was a fairly large number  (8,200), in percentage terms, this was "only" a fall of 1.6 percent, far smaller than the drop in the number of unemployed.

Let me conclude by moving from the math of these calculations and show that in spite of these percentage changes and the way the unemployment rate is calculated, the August data show that a substantial number of Rhode Island's unemployed dropped out of the labor force, presumably as they were unable to obtain suitable employment. Make no mistake, however, the simultaneous and relatively large drop in resident employment is every bit as troubling as this, as it is reasonable to conclude from this rather rare trend that thousands of self-employed Rhode Islanders also "threw in the towel" on their business enterprises. Either way, this indicates that Rhode Island has entered a period of slower economic growth, which is entirely consistent with the recent behavior of my Current Conditions Index. 

RESULT #3: ALWAYS FOLLOW A SET OF ECONOMIC INDICATORS RATHER THAN A SINGLE ONE.