Current Conditions Index Report: December 2011

This is an abbreviated version of the December Current Conditions Index report for December. The complete report (which includes the data table), along with reports dating back a number of years, can be found on my website: http://www.llardaro.com .


The year 2011 ended on a bit of a sour note. While Rhode Island’s economy started off the year fairly well, as the Current Conditions Index registered very positive readings through April, in the months that followed Rhode Island’s economy began to slip towards stall speed until November. November’s CCI reading of 67 held out the prospect that we might at last be breaking out of the neutral range we had been stuck in as the year ended, and as we moved into next year. But December’s CCI reading put an end to that speculation, at least for now.

For December, the CCI returned to 58, still an expansion value, as seven of the twelve indicators improved. The good news is that Rhode Island’s recovery is now 22 months old. The bad news is that the CCI has now failed to exceed its year-earlier value for ten consecutive months. So, the perpetual churning that occurs in any economy, with positive and negative forces interacting, continues here. The positives appear to continue holding the upper hand, as the CCI remains above its neutral value of 50. But the ultimate question is how strong that hand is. While it is still too early to make a definitive call about any possible breakout in the coming months, potentially there is a hidden positive — very soon the revised labor market data for 2011 will be released. I have come to believe that these data revisions will show that Rhode Island’s economy has actually been performing than we now think. But confirmation is still needed to validate my suspicion.

Therefore, the most logical place to begin analyzing this month’s results is with the five non-survey based indicators. Overall, their December performance was positive. The most noteworthy of these, improved yet again (+4.1%) capping a surprisingly strong holiday shopping season. Importantly, the recent strength in Retail Sales occurred in spite of declines in US Consumer Sentiment (-6.5%). Better yet, on a monthly basis, US Consumer Sentiment has now improved for four consecutive months and it appears to be gaining momentum along with more favorable national economic statistics and a rising stock market. New Claims, a leading labor market indicator that reflects layoffs, fell by 17 percent in December, following five months where it failed to improve. Benefit Exhaustions, one measure of long-term unemployment here, fell again, by 17.8 percent. This indicator has been in a downtrend since March of 2010, one month into the present recovery. Finally, Single-Unit Permits, which reflects new home construction, perhaps the most volatile of the CCI indicators, declined by 20.3 percent in December.

The remaining seven CCI indicators are all survey-based, so I expect many of their values to be revised soon. Keep in mind that only their yearly changes matter for CCI values. Our Labor Force continued to perform very badly in December, falling by another 2.3 percent. On a monthly basis it did improve, which makes the November — December rise in our Unemployment Rate less of a negative. Total Manufacturing Hours, a mainstay of this recovery, jumped sharply (2.5%), as the workweek rose again. The Manufacturing Wage surged again by over 17 percent in December, for those who believe in economic miracles. Employment Service Jobs, a leading labor market indicator that includes “temps,” fell by 1.1 percent, but this should not come as much of a surprise given its very difficult “comp” from last year. Based on the existing data, this indicator appears to have bottomed. Finally, Private Service-Producing Employment continued to grow, albeit slowly (+0.4%), while Government Employment fell once again in December, by 2.3%.

THE BOTTOM LINE:
I always view December as “the dark side of the moon” when it comes to economic data here, since, like the astronauts, we too are almost entirely out of touch with what is actually occurring at that time. I expect positive revisions to a number of labor market indicators, but it is not clear what the magnitudes of those changes will be. I truly hope the picture that emerges is materially better than what we have come to believe, since substantial downward revisions would reflect a path far more difficult for us to manage.

A Long Look Back at the Number of Employed Rhode Islanders

There are actually two different measures of employment that get published each month, although reporting generally tends to focus only on one of these. The most-frequently followed number, payroll employment, measures the number of jobs in Rhode Island. The other measure, which I have commented on in several recent posts is resident employment -- the number of Rhode Islanders who are employed.

There are several major differences between these measures, and they don't always provide the same picture of how well our state's labor market is performing. The major difference is that these come from two separate surveys. Payroll employment is derived from the Current Employment Survey (CES) until those estimated values are eventually updated and linked to the much more inclusive sample, the Establishment Survey. The realigning of these, which occurs with the release of the January date each February, is called rebenchmarking. Resident employment is derived from the Household Survey. The unemployment rate and labor force also come from this survey. It too will see data revisions when the January data are released in a few weeks.

Two other differences are highly significant. The first of these is that resident employment includes the number of jobs held by Rhode Island residents, whether they work in Rhode Island or at other locations. So, persons working in other states are included in this measure. Second, self-employment is reflected in resident employment, but not in payroll employment.

Theoretically, payroll employment is considered to be the more reliable way to track employment, based primarily on the fact that it has a much larger sample (eventually -- the Establishment Survey). But resident employment matters a great deal for Rhode Island since we "rent" so many of our residents out to nearby states for their jobs, and small businesses are such a critical part of our state's economy. Since payroll employment gets so much attention here, often to the exclusion of resident employment, in this post I will take us all the way back to the late 1970s and view resident employment since that time period.

The chart below (click to enlarge) shows how much resident employment each month has changed from the same month in the previous year (i.e., the year-over-year change).

I have made a number of annotations in this chart. The first relates to the largest rise in resident employment over this entire time span, which occurred in May of 1984. Some of you will recall that 1984 was the last year that manufacturing employment actually rose in Rhode Island, which is reflected in that large spike.

Things went downhill after that, as Rhode Island's manufacturing era ended in late 1987, and we eventually reached our largest decline up to that point as the banking crisis unfolded in 1991 (we were also in a recession at that time). We finally began to regain our footing by 1995, as declines in resident employment finally ended and it moved to its highest increase since the end of the manufacturing era.

One of the most striking features of how resident employment has behaved since 1995 has to be that  our peak increases have continued to diminish through time. The dashed red line shows this as a line of "resistance" -- lower highs through time. As for declines, had it not been for "The Great Recession," our lows would have remained somewhat contained, at decreases of around 10,000 (some containment!!). I have labelled this as a "support" line. Ironically, Rhode Island's last trough occurred in March of 2009, just as the stock market was bottoming!

According to these data, our most recent peak increase, which occurred in 2010, was also below the level we observed when payroll employment (the other measure) reached its peak all the way back in December of 2006. At the present time, the available data show that resident employment continues to decline relative to year-earlier levels by alarmingly large amounts, around 7,000.

As bad as that sounds, there is very likely to be reason for hope in this. That is also the case for the data I didn't discuss here, payroll employment. Historically, when data are revised higher in a given year, as Rhode Island saw last year, revisions the following year result in worse numbers. So, history is against us. From my reading of the set of all the economic numbers for Rhode Island that I follow, I expect the revised labor market data this year to show that our state's labor market performance has actually been better than we had been led to believe based on the data available up to this point. I haven't had the time to explore the likely levels that these revisions should take, but the upward revisions to the national data released last Friday gives further impetus to my expectation of upward revision. 

So, remember the monthly decline of about 6,000 jobs (payroll employment) a few months ago? I expect it to soon be revised away. Lately, has resident employment been as bad as the existing data and above chart show? I seriously doubt it, especially since resident employment includes Rhode Islanders who work in other states such as Massachusetts that are doing a lot better than we are. We'll just have to wait a few weeks to wait and see the final data revisions. While I expect the labor market here to have been performing better than we though, I don't expect any wild and large upward revisions, so let's not get carried away! After all, direction and magnitude are not the same thing. Had employment here been much higher than we had thought, tax revenues at this point would have risen far beyond the actual levels we have observed.

One More Thing To Worry About

I was struck a few weeks ago when the third quarter personal income for Rhode Island was released and it indicated that our state's personal income fell. I quickly went to the Bureau of Economic Analysis' web site (www.bea.gov) and looked over the various components of Rhode Island's personal income change. In a very short time my general presumption was confirmed: a fairly substantial decline in transfer payments did Rhode Island in. This can be further summarized with just two words: unemployment insurance. This might seem like good or neutral news, but it is not. A little background on this should help to explain why.

The way that our state's economy is "built," which is true of all other states and the nation as a whole, is that when economic conditions deteriorate, be it from a slowing of economic growth or a full-blown recession, the resulting decline in income is "cushioned" by changes in transfer payments. If you are not familiar with what transfer payments are, these are transfers of income from taxpayers to persons based on their qualifying for programs such as unemployment insurance, food stamps, welfare, etc. You might know these by another name: entitlement spending. They get this name from the fact that government does not (contrary to its wildest dreams) set the total amount that is ultimately spent on these programs. Instead, government merely sets the criteria for entitlement along with various parameters that pertain to amounts paid and the maximum duration of benefits.

What, then, determines the amount that is ultimately spent on entitlements? This is based on how well or how badly the economy performs. So, as noted earlier, during times of economic weakness, as income declines, more people satisfy the criteria for entitlement to various programs, and they are allowed to receive the benefits they have qualified for. As this occurs, transfer payments or entitlement spending automatically rises, helping to offset weakness in income. It is important to be clear that the resulting increases in transfer payments are never large enough to totally offset income declines. The offset is only partial.

At this point, a few points need to be stated. First, there are two types of entitlement programs: those that are cyclical, and hence related to the overall level of economic activity, and secular-based entitlements like Social Security and Medicare. In this post I am only referring to the cyclically based entitlements. Second, cyclically based transfer payments and entitlements are countercyclical -- spending on these programs moves in the opposite direction of the overall economy by design. Finally, because spending on these rises during weak economic times, these add an element of stability to  the overall economy. Economists often refer to this as "automatic stabilization." 

Equipped with this background, a chart of quarterly wage and salary income for Rhode Island along with transfer payments (both expressed as percentages of personal income) should illustrate the basis for my concerns about the income report. In this graph, it should be apparent that when Rhode Island's employment weakened, then began falling after 2006, wages and salaries fell from about 22 percent of personal income to a low of about 16 percent. As everyone knows, because Rhode Island's employment peaked so early (December of 2006, a full year before the US), this produced the very high unemployment rates we have been burdened with for years now. The "bright" side of this, if you want to think of it this way, is that this high unemployment ushered in substantial increases in transfer payments (also for food stamps and welfare), moving transfer income from about 17 percent of personal income in late 2006 to about 21 percent in 2009 and beyond.

The result was some offset to the lost wage and salary income which made the recession here less deep and severe than it might otherwise have been. My concern, however, is what has begun to occur during the most recent quarters: employment has remained very week here, causing wage and salary income to remain at a reduced percentage of personal income at the same time that increasing numbers of Rhode Islanders are exhausting their unemployment insurance benefits (many after 99 weeks of benefits), which is causing entitlements to fall relative to income. In other words, these two are no longer offsetting. Weakness in each is reinforcing declines in the other. This bodes very badly for income growth in future quarters, especially our ability to sustain the strength in retail sales we observed in the last part of 2011.

Looking forward to the remainder of 2012, this becomes yet another question mark for Rhode Island's economic future. As employment here remains about 7 percent below our late-2006 employment peak and our state's unemployment rate stays in the "top five" nationally, things here continue to look very weak overall, in spite of occasional improvements in our cyclical performance. But is the existing labor market date that lies at the heart of all of this accurate?

Historically, in the year following upward date revisions, which we saw last year, the data are revised lower. I refuse to believe that when the next round of labor market rebenchmarking occurs in late February these atrocious numbers will remain or be made worse. IF that occurs, and I truly hope it doesn't, I will have a great deal more to say about what Rhode Island needs to be concerned with and the pace at which our leaders will need to start dealing with our structural problems.  Stay tuned!

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?