Current Conditions Index: January 2012

This post is an abbreviated version of my Current Conditions Index report for January of 2012 (it omits the indicator table and "The Bottom Line." For the full report, as well as PDF files with past reports, you can visit my web site: http://www.llardaro.com . This report was covered fairly well by the local media. As always, the Providence Business News did a very nice job of discussing the report, as did GoLocalProv.com. The ProJo also had its usual couple of paragraphs (only). The message from this report: as the national economy accelerates, Rhode Island is being left behind. The prior three posts provide you with much additional detail.




Rhode Island begins 2012 equipped with its newly revised labor market data. The prior data had painted a rather grim picture with Rhode Island’s economy being essentially “dead in the water” for much of the second half of 2011. I had hoped the new data would show that things here were materially better than what we had been led to believe, especially concerning the abysmal performances of our Labor Force, Unemployment Rate, and the two employment series, Resident and Payroll Employment. I wasn’t sadly disappointed by the revised data. More to the point, I was alarmed by how much worse the actual performances of every one of those data series were. To summarize this very succinctly: the “good stuff” (the Labor Force, and both kinds of employment) was revised sharply lower while the “bad  stuff” (the Unemployment Rate) was revised significantly higher. In light of these new data, we need to rethink much of what we had thought about our state’s labor market performance. Check my Blog in the coming weeks for charts and posts about this.

This does not necessarily mean that the overall picture of Rhode Island’s economic performance in 2011 needs to be entirely overturned, though. The assessment of overall performance must be based on a broadly based set of indicators, which is precisely what the Current Conditions Index was designed to do. For 2011, three monthly values were revised lower (January, November, and December), while one (March) increased. Based on these changes, Rhode Island’s economy was a bit more “dead in the water” than I had earlier thought. In spite of this, our exceedingly tepid recovery did continue, albeit barely since the second half of 2011. Our bright spots, most notably Retail Sales, remained. It was our sore points that turned out to be quite a bit more sore. Sadly, or happily, depending on your preference, they still failed to improve, but by wider margins.  

Let’s begin indicator discussion with the bright spots. For January, the Current Conditions Index registered a value of 58, as seven of the twelve indicators improved. January’s CCI reading exceeded that from a year earlier, breaking a string of 10 consecutive misses. Rhode Island’s recovery is now 23 months old.

Retail Sales improved for the fifth consecutive month (+3.5%), starting off 2012 on a very positive note. US Consumer Sentiment rose in January (1.2%), breaking a string of seven consecutive declines. Rhode Island’s manufacturing sector showed significant strength, with Total Manufacturing Hours surging by 7.3 percent, based on greater employment and a sharply longer workweek, both of which helped to give some credibility to the dramatic increase of 19 percent in the Manufacturing Wage.  Benefit Exhaustions, a measure of long-term unemployment, fell again, by 10.7 percent. At the other end of the jobless spectrum, New Claims, a leading labor market indicator that includes layoffs, rose sharply, by 8.2 percent. Sadly, its uptrend appears to remain intact. Single-Unit Permits, which tracks new home construction, the most volatile of the CCI indicators, surged by 67.4 percent in January, obviously affected by weather.

Our Labor Force continued its more-horrible-than-we-knew performance in January (-0.9%), and with this the decline in our Unemployment Rate was not welcome news. Employment Service Jobs, a leading labor market indicator that includes “temps,” fell for a tenth time. Finally, Private Service-Producing Employment declined again (its levels were revised lower) as did Government Employment.

Dates That Will Live in Infamy?

In the previous post, I showed the rebenchmarked payroll employment data since 2009. In order to show how dire things have now become in Rhode Island, I am including a graph of payroll employment going back to 1990, with specific dates of turning points highlighted (click to enlarge).

I hope that those who have been around Rhode Island for a while will be able to put events with the dates of turning points. What I find very striking, however, is how the current employment drop is not unlike that in 1990 and 1991, as the banking crisis unfolded. Clearly, the percentage differences are not the same today and they were during the 1990-91 period, but we had something going for us in 1990-91 that we don't today: back then, we were barely past the transformation to a post-manufacturing economy (that occurred in Q3 of 1987). In other words, we had a margin for error that has long since disappeared.

The final question: Will Rhode Island make a run like it did in the early 1990s until the peak in December of 2000? Back then, our state's goods-producing sector was much larger than it has become today, and along with that decline we have lost the large goods-producing multipliers and their ability to get recoveries going rather briskly. Recall also, there was a rather sizable tech boom in the 1990s, the likes of which we might not see until battery technology is truly advanced, or some other advances we are not yet aware of emerge into positions of prominence.

Do I think Rhode Island will now make a major move up in its payroll employment during the next few years? Sadly, my answer is an emphatic NO! We have lost the margin for error a manufacturing-based economy once afforded us and the way this state is run is not conducive to the requirement of highly proactive government in the post-manufacturing era. Add to this that overhead, primarily pension obligations, dominates virtually all decision making here, and the primary question is whether Rhode Island's payroll employment will be able to sustain itself above the recent trough, and its levels in May of 1998 and April of 1990.

Rebenchmarked Payroll Employment: We're Falling!!!

The recently rebenchmarked labor market data for Rhode paint a very dismal picture. Not only was payroll employment here less than had been thought through much of 2011, it has actually been falling for the last several months. Worse yet, not only has payroll employment been declining, it has now fallen all the way to within 700 jobs of its low since before the last recession!

Normally, I would say that a picture is worth a thousand words. In this case, it is more appropriate to rephrase this to say a thousand tears. Look very carefully at the chart below of payroll employment since 2009 (click to enlarge).

So, as the US economy and most notably national payroll employment continues to accelerate, Rhode Island finds itself not only with declining employment, but it has experienced a series of monthly declines that have moved payroll employment to just slightly above the trough it attained in July of 2009, and all the way back to its level in May of 1998! All that remains between Rhode Island's January 2012 employment level and its recent trough is 700 jobs. So, as of January, 2012, Rhode Island's payroll employment remains 7.8 percent below its prior peak.

As I finish this post, let me reiterate a statistic that I have cited here on numerous occasions: payroll employment in Rhode Island peaked in December of 2006, a full year before the US employment peak. Happy 5th anniversary, Rhode Island!

Rhode Island's Real GDP for 2010

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

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

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

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

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

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

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

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

On Rhode Island's Proficiency with Math

This is a very short Letter to the Editor I submitted to the ProJo today. I don't know if it will end up being published, so I wanted to include it in my Blog.

I want to help correct an error that keeps occurring in the discussion of raising various tax rates that has been driving me crazy. Just about everyone in this state seems to be confusing percentage point changes with percent changes. These are not the same thing.

For example, the proposed increase in the sales tax rate on meals from 8 to 10 percent is two percentage points, not two percent. Think of it this way: for percent changes, you multiply the original number by something (here .02). For percentage point changes, you are either adding or subtracting values from an overall total (here adding 2.0). If I haven't already confused you too much, going from 8% to 10% is actually a 25% increase (=2/8).

I’ll leave it to you to do the math for the proposed increase in the maximum income tax rate from 5.99 to 9.99 percent (hint: it’s not even close to 4 percent, as was reported).

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?