Current Conditions Index: November 2012

Below is an abbreviated version of the November Current Conditions Index report. The full report (in PDF format) along with tables and historical reports is available on my web site: http://www.llardaro.com .

----------------------------------------------------------

As we moved further into the fourth quarter, the Rhode Island economy posted yet another strong performance. In November, Rhode Island’s economy sustained the jump in momentum we witnessed last month, which was itself the best we had seen here for quite a while. Using the flawed “official” labor market data, the Current Conditions Index registered a score of 75 for November, as nine of the twelve CCI indicators improved. And, a number of those improving indicators registered strong changes. Looking beyond the labor data inaccuracies, the more correct score for November is 83. Rhode Island’s recovery was 33 months old as of November.

This back-to-back strength provides a critical piece of evidence supporting the hypothesis that October’s strong performance was not a “one month wonder.” What we appear to be witnessing is a trend of more broadly based economic activity that has generated increased economic momentum. It thus appears that Rhode Island’s economy has now shifted into a higher gear.

This seems to suggest that the trend of uneven economic activity, the bounces in monthly CCI values we had been witnessing over the past several months, has now ended. However, just as it is not wise to place too much emphasis on the results of a single month, while two months tends to be more convincing, even more data is needed before it will be safe to arrive at this conclusion. In spite of this, it is now an appropriate time to address a meaningful distinction in terms of the assessment of economic activity: levels versus rates of growth.

The Current Conditions Index is a momentum indicator. Its values reflect how broadly based economic activity is (i.e., the greater the number of improving indicators, the more broadly based is economic activity) and the resulting underlying momentum. It does not, however, dwell upon the levels of the various indicators or the overall economy. So, at present, assuming the fourth quarter results hold, we are witnessing a broadening of economic activity here that has produced greater momentum. This reflects the rates of change of the CCI indicators and our state’s economy.  It says nothing about current levels. This is where things get a bit discouraging: while Rhode Island’s economy is improving, the levels of key variables like payroll employment remain far below the values they attained at the height of the last recovery (our employment peak occurred in December of 2006). We still remain about six percent below our employment peak. The recent CCI performance indicates that we are moving toward our prior peak at a more rapid rate. Obviously, the greater is sustained momentum, the shorter is the time before we reach a prior peak. 

  

For November, (at least) nine of the twelve CCI indicators improved. Importantly, November saw only the second increase in our state’s Labor Force since the end of 2010! Four of the five non-survey-based indicators, those that don’t suffer from the flaws currently plaguing the “official” labor market data, showed substantial improvement versus one year ago. Retail Sales sustained its recent strength, registering a strong 6 percent growth rate versus last November, its eleventh increase in the past thirteen months. Along with this, US Consumer Sentiment once again surged by just under 30 percent, helped by improvement in the national economy. Benefit Exhaustions, reflective of longer-term unemployment, also fell at a double-digit rate (-12.3%), sustaining its downward (improvement) trend. New home construction, based on Single-Unit Permits, rose by 3 percent, providing further evidence that it reached a bottom several months ago. In spite of this, its levels remain subdued, partly the result of our state’s declining population. The sole disappointment was for layoffs, in terms of New Claims for Unemployment Insurance, which rose by 1.6 percent. 

See the full report at: http://www.llardaro.com  .

Images of Rhode Island's Economic Management

Yesterday I gave a presentation to SBANE in Warwick. Following the presentation I was asked to make two of the images I used available to other persons, which is the purpose of this post. While these images are satirical, unfortunately for Rhode Island, they embody more than a modicum of truth in characterizing Rhode Island's approach to economic matters. Click on these to enlarge them.

#1: The "State of the Art" for Long-Term Planning in Rhode Island

#2: Rhode Island's Culture of Redundancy permeates all levels of government. This has generated huge fixed costs for RI government to manage. Ultimately the result has been for fix costs to play far too large a role in decision making here (partial explanation for image #1 above)

Sad but true!

These highlight important contributors to what I have referred to for years now as Rhode Island's ENDOGENOUS MEDIOCRITY. Here's the link to a ProJo article I wrote about this back in 2009.

Current Conditions Index: September 2012

Below is an abbreviated version of the September Current Conditions Index report. The full report (in PDF format) along with tables and historical reports is available on my web site: http://www.llardaro.com .

----------------------------------------------------------

The third quarter ended on a bit of a sour note. While Rhode Island’s economy remained in a recovery the magnitude of which almost nobody in this state seems to fully comprehend, the pace of that recovery tapered off a bit in September following a very strong August. In fact, over the past six months, Rhode Island’s economy has apparently been unable to sustain and extend the momentum from months with very strong performances — these have consistently been followed by months with more moderate paces. So, while on average, underlying strength here has been sustained, throughout the past six months a frustrating pattern has emerged where faster-growth months are followed by slower growth the next month.

This pattern can either be good news or bad news as the US faces the dreaded “fiscal cliff” as we move towards December 31. Should our state’s recent “stop and go” pattern of more rapid economic growth move more consistently toward “go,” we will have a better margin of error should the US fall off the fiscal cliff. Make no mistake — we too would quickly be dragged down along with the US. Should the “stop” pattern come to dominate, obviously we would find our state closer to stall speed even prior to year end.

Either way, the effects of the possibility of the fiscal cliff have already begun to adversely affect businesses. Uncertainty surrounding the ultimate outcome has hindered their ability to plan for the future, resulting in their postponing investments in both physical capacity and hiring. Resolution of the fiscal cliff will also involve fiscal policy lags, so the ultimate impact of the changes that emerge will occur throughout the first half of 2013. 

For September, six of the twelve CCI indicators showed improvement, giving a monthly CCI value of 50 using the “official” data that we know is flawed. Based on my simulations, the more correct CCI value for September is 58. In spite of the CCI’s decline from August, there is still positive momentum occurring. Of the five non-survey-based indicators, those that don’t suffer from the flaws currently plaguing the “official” labor market data, three showed improvement in September versus five last month. However, one of those indicators, Retail Sales, had a very difficult “comp” to beat from a year ago, so its decline this month should not be construed as  a reflection of weakness. 

So, what do we actually know about Rhode Island’s September   economic performance? Rhode Island’s recovery is now 31 months old. Looking at the non-survey based indicators, even though Retail Sales fell by 2.4 percent in September, it remains surprisingly strong, having risen for ten of the past twelve months. US Consumer Sentiment once again surged by over 30 percent, helped by recent stock market momentum and actions by the Fed. 

---------------------------------------

See the full report at: http://www.llardaro.com  .

Current Conditions Index: August 2012

Below is an abbreviated version of the August Current Conditions Index report. The full report (in PDF format) along with tables and historical reports is available on my web site: http://www.llardaro.com . 

----------------------------------------

Up until last month, it appeared that Rhode Island’s economy had already seen the long awaited acceleration in activity come and go. Clearly, we improved at the end of 2011, which provided us with momentum through the first quarter of 2012. Then, this  economic momentum began to slow, placing us in the situation with higher levels of many indicators, but their overall  rate of growth was decelerating, a possibility that could potentially move our state’s economy to stall speed at some point in the future. But the August results show some real strength and quite possibly a re-acceleration in Rhode Island’s economic momentum moving forward. So, any discussion of the potential for reaching “stall speed” should be put on the backburner at this point.

For August, eight of the twelve CCI indicators showed improvement, giving a monthly CCI value of 67 using the “official” data that we know is flawed. Based on my simulations, the more correct CCI value for August is 75 (or possibly 83, but that’s too close a call). What I find most encouraging for August is the fact that all of the non-survey based indicators, which don’t suffer from the flaws currently plaguing most of the labor market data, showed significant improvement, something that doesn’t occur very often enough here.

Ironically, the “official” labor market data continue to show an economy that fell off a cliff about a year ago, with payroll employment now declining on a year-over-year basis for twelve of the last thirteen months. Let me renew my challenge to anyone using that data to conclude anything other than the existence of a double-dip recession here. Ironically, though, the “official” labor market data, which typically become more negative starting around this time of year are becoming less so, indicating that the measurement error might now have changed direction. Go figure!

So, the potential re-acceleration reflected in the August data may be showing that Rhode Island’s economy is gaining some momentum just as the US economy is. For both, this is occurring as Europe remains mired in recession and Asian growth has slowed. Monetary policy lags (6-12 months) preclude recent monetary changes by the Fed and ECB from directly causing this momentum, other than positively influencing confidence and investor appetite for risk.

--------------------------------------------
See the full report at: http://www.llardaro.com  .

Current Conditions Index Report: July 2012

Below is an abbreviated version of the July Current Conditions Index report. The full report (in PDF format) along with tables and historical reports is available on my web site: http://www.llardaro.com .

Rhode Island began the third quarter with both good news and bad news. The good news is that its economy actually accelerated at the end of 2011 into mid-2012. While the “official” labor market data continue to show an economy that has fallen off a cliff (I challenge anyone using that data to conclude anything other than RI has entered into a double-dip recession), reality has been very different! The bad news is twofold: first, almost nobody in this state realizes that such improvement in levels and acceleration in the pace of activity occurred (unless they have been following this index and my Blog); second, it is now very clear that the pace of activity Rhode Island attained earlier this year has now moderated significantly. Both the CCI values based on the “official” data (the upper value) and my estimation of the actual numbers (the lower number) show that Rhode Island’s economy has shifted into a lower gear: the “official” number for July fell to 50 while my estimated value declined to barely expanding, at 58.

So, the question now shifts to which indicators will take the proverbial baton and lead any future improvements? While the US economy has slowed, both the Federal Reserve and the European Central Bank have taken strong steps to avoid significant downturns in economic activity during the coming months. One outcome of this, a weakening US Dollar, should help to moderate and hopefully offset some of the recent weakness in our state’s manufacturing sector as exports benefit. Unfortunately, there is a rather long lag before dollar depreciation normally translates into significant improvement in US (and Rhode Island) manufacturing.

In light of all of this, what do we actually know about Rhode Island’s current economic performance? As of July, Rhode Island’s tepid recovery that began in February of 2010, now 29 months old, continues to lose momentum, most notably in the areas of manufacturing and retail. For July, Retail Sales fell (by 1.6%), its first decline since last August, following real strength over every month prior to July of this year. Total Manufacturing Hours barely rose in July (+0.1%), as the workweek declined. Of course, we are told that our Manufacturing Wage is still growing at what is likely the most rapid rate on earth (+11.8%).

In spite of this, things here are now and will remain significantly better than what the “official” data show, especially since the flawed “official” data can be expected to begin showing ever-larger employment declines for the rest of this year. Even for July, we were told that payroll employment fell by an eye-opening 7,300 compared to a year ago. A more accurate reading can be obtained by reversing the sign of the “official” payroll change — overall employment is likely around 7,000 higher than what the “official” data show.

See the full report at: http://www.llardaro.com  .

Rhode Island Data for July 2012

I have posted a table with data on a large number of economic variables -- most of which are based on the flawed "official" data for Rhode Island over the past twelve months: http://www.llardaro.com/current_performance.htm . As horrible as the labor market data are, remember these will all be revised higher eventually, so things here are not as bad as the data make things appear.

Early next week I will be releasing the July report for my Current Conditions Index. Stay tuned!

Current Conditions Index: June 2012

Below is an abbreviated version of the June Current Conditions Index report. The full report (in PDF format) along with tables and historical reports is available on my web site: http://www.llardaro.com .
..............

Rhode Island ended the second quarter on a rather mixed note. While the “official” labor market data continue to depict an economy that is not only falling off the proverbial “cliff,” but that has entered into a double-dip recession, a news release from the Governor’s office, based on analysis from the Department of Labor and Training, stated that employment here is not actually falling, as the DLT monthly data continue to show, but has actually been increasing for some time now (the release covered the first quarter of 2012). Apparently, this came as a big surprise to much of this state’s media, even though the errors with the “official” labor market data were publicly acknowledged by the DLT months ago and I have been discussing all of this regularly in my Current Conditions Index reports. Recall, this data divergence caused me to begin providing two CCI values each month — one based on the “official” data and the other using my simulated labor market values.   

What do we actually know overall about Rhode Island’s current economic performance? Rhode Island’s economy continues to be in a tepid recovery that began in February of 2010, now 28 months old. While economic reality here is far better than what the “official” data show, the non-flawed data indicate that this recovery displayed some loss of momentum during the second quarter that will likely continue moving forward. It is important to note, however, that even using the flawed “official” labor market data, the Current Conditions Index never gave a recession signal. Furthermore, based on my simulations (the other CCI values listed), Rhode Island’s economy has been able to sustain some of the momentum it gained during the second half of 2011, although this that momentum bas begun to erode based on the performances of several key individual indicators.  

According to my econometric models, there were three noteworthy but problematic indicator changes in June. First, payroll employment, which has been rising for some time now on a yearly basis (albeit at declining rates) actually declined. Second, this employment weakness translated into an uptick in Rhode Island’s monthly Unemployment Rate from my projection of a 10.7 percent rate in May to 10.8 percent in June. Finally, the rate of growth in a very important labor market indicator, Private Service-Producing Employment, has slowed dramatically over the past two months, barely increasing in June.

See the full report at: http://www.llardaro.com  .

Upcoming Employment Data Revisions: "Official" Data Far Off Mark

For several months now, I've been pretty much alone noting how payroll employment in Rhode Island would be revised substantially higher, both in my Current Conditions Index reports and prior Blog entries. Over this period, I have continually stated how employment here is behaving very differently than what the official data were showing. The basis for this dates back to a number of months ago when the Rhode Island Department of Labor and Training (DLT) stated at the most recent Revenue Estimating Conference that employment as of the end of 2011 had not been declining, but actually rising. Based on this, I dusted off my econometric models and began generating projections of what I believe payroll employment would ultimately be revised to.

This was a very lonely endeavor, as I appear to have been the only person in this state noting that the official data were incorrect and far too pessimistic. So, while everyone continued to say that Rhode Island was on the verge of a recession, something I too had said until I learned of the possible revisions, I tried in vein to note that this was very far off the mark. And, even if we were to eventually fall to a double-dip recession, presumably based on global weakness or national weakness, at least we would have some margin for error.

Today, the DLT and Governor Chafee released a report confirming substantial future upward revisions to our state's payroll employment data. According to this press release:

"A recent analysis of tax data shows that Rhode Island job growth exceeded original estimates for the first quarter of 2012, according to the RI Department of Labor and Training ...  The new estimate for Rhode Island-based jobs as of March 2012 is 464,700 jobs, up 7,000 from earlier numbers reported in April. The earlier estimate indicated that Rhode Island-based jobs had dropped over a year's time by 2,200. However, the new estimate shows that Rhode Island-based jobs had likely increased by 4,800 from March 2011 to March 2012."


This is consistent with what my econometric models had been showing. Ironically, my estimates were a bit too low, as they showed a clear uptrend since October of last year, but to a level below the apparent upward revision. The chart below (click to enlarge) shows the "official" data and my estimates.

Based on this, let me reiterate a few points I have been making over the past several months:

1. Rhode Island is not on the verge of a double-dip recession;
2. Our state's unemployment rate is not the currently-published 10.9%, but lower, based on the higher payroll employment numbers. My models project a 10.7% rate as of May; and
3. As good as these results are, my models agree with the existing data that Rhode Island's labor force has been, and continues to, decline.

So, at this point, let me take the leaders of our state and its media to task for being far too pessimistic about the state of Rhode Island's economy. Think about that for a moment: me, Leonard Lardaro, accusing our leaders and the state's media for being too negative! Ain't that a bitch!!

Let me conclude by stating something that this points to, which I have been saying for far longer than I can remember: Accuracy is far more important than tone!

Current Conditions Index: May 2012

This is an abbreviated version of the full Current Conditions Index report for May. The complete version, which includes the indicator performance table and the report in PDF format, can be found on my web site: http://www.llardaro.com .

Rhode Island’s economic outlook in May is similar to that from April: the current tepid recovery is continuing, although signs of a loss of momentum have become more readily apparent. The good news is that Rhode Island is still in the recovery that began in February of 2010, which as of May reached its 27^th month. The concerning news is that like the US, our rate of improvement has slowed.

In discussing this, I am not referring to the questionable “official” labor market data currently being released by the DLT. According to those figures, payroll employment here has now either declined or remained unchanged on a year-over-year basis for ten consecutive months. I challenge anyone who chooses to believe those numbers to reach any conclusion other than that Rhode Island has already entered a double-dip recession. In fact, even the DLT has admitted publicly that a number of those published year-over-year employment declines never occurred — they will be eliminated when the data are revised in coming months.

Fortunately, if we focus on more accurate data and the Current Conditions Index, which is a broadly based index, it is clear that some of the momentum we witnessed as 2011 ended and we moved into 2012 has begun to fade. While the pace of economic activity here isn’t all that great, my econometric models show that payroll employment has slowed to an annual growth rate of around 0.3 percent. The Current Conditions Index for May, based on the “official” data, shows a reading of 58, once again in the expansion range. The other displayed value, 67, is the likely value when the “official” data are eventually revised. Based on those alternate values, the CCI has now moved from values around 75 down to 67. As I have noted for several months now, it is the persistence of these expansion range CCI values that matters the most for now.

On a year-over-year basis, four of the five non-survey-based CCI indicators improved. Only three of the five showed improvement on a monthly basis, though. Retail Sales surged by 9.9 percent compared to last May, its ninth consecutive improvement. To some extent this is weather related. The skilled Rhode Islanders we rent out to neighboring states who bring their income home with them also directly impacts this indicator. Overall, such substantial Retail Sales momentum argues against making any recession call.  ......



The remainder of this report and the complete version, which includes the indicator performance table and the report in PDF format, can be found on my web site: http://www.llardaro.com .

Is Government Employment in RI falling?

Over the last six years, total government employment in Rhode Island appears to have fallen a great deal -- probably more than most of us might have thought possible at one time. Obviously, all of the budget cutting that has occurred since 2006 has played a role in this. One might also think that the recession itself would also have had a large negative impact. However, the stimulus plans from the past few years actually helped Rhode Island and many other states avoid state employee layoffs, although this type of help appears to have now ended.

Let's take a look at government employment in Rhode Island, which consists of federal, state, and local government employment. The chart below shows this going all the way back to 1990 (click to enlarge).

Total government employment peaked here in March of 2006 at 66,900. Over the next six years, through March of 2012, it declined to "only" 59,800, which was a 10.6 percent drop. Do we conclude from this that our state's public sector has truly contracted more than it should have and that no further declines should occur? Hardly. The chart above looks at government employment in absolute terms, independent of anything else. For those of you who have read many of my posts, this is not the correct way to approach this -- a relative view is more appropriate.

Our relative view is accomplished by looking at government employment relative to overall (payroll) employment. This is shown in the next chart (click to enlarge) that covers the same time period as the original chart.

Several things should jump out from this chart. The most obvious feature is the longer-term (secular) downtrend in government's share of payroll employment in Rhode Island. To help explain this to persons who might find this chart confusing, let me point out that government's share declines when it falls relative to overall employment. This does not necessarily mean that government employment, or for that matter, payroll employment, is declining. During periods of economic growth, this indicates that government employment grew less rapidly than did payroll employment.

The second significant feature is that starting in November of 2007, one month before our state's employment peak, government's employment share began rising, as it would through May of 2010, from a 13 percent to 13.8 percent of payroll employment. This reflects the fact that over this period, government employment was declining by less than did payroll employment. While this uptrend lasted for three years, government's share of payroll employment eventually began to decline once again as it now has for the past two years.

The final noteworthy element of this chart is that in spite of the decline in government's share over the past two years, government's share has remained above the levels consistent with its secular downtrend. This is reflected in the way the line for government's share has stayed above the dashed gold line reflecting the secular trend. So, while it might appear that a valid conclusion from the first chart is that Rhode Island's government employment may well have contracted enough, or perhaps too much, this is less obvious when viewed in the more proper context of government employment in the setting relative to overall employment.

To help better comprehend what underlies these charts, the next chart disaggregates the information contained in the second chart, looking at the shares of each of the three components of total government employment (click to enlarge).

Since 1990, state government employment's share has fallen noticeably, from 5 percent of payroll employment in the early 1990s to 3.5 percent at present. As this was occurring, federal government employment's share has remained virtually unchanged, starting at 2.4 percent in 1990 and falling only slightly to 2.2 percent at present. Clearly, local government employment's share rose from 6.6 percent in 1990 to its peak of 8 percent in March of 2006. At present, local government employment's share remains at 7.4 percent of payroll employment. That is highly significant, since local government employment is by far the largest component of total government employment in Rhode Island, exceeding the sum of the two other components. Within local government employment, local education employment comprises approximately two-thirds of its total.

Overall, as of May 2012, local education employment, the largest sub-component of total government employment in Rhode Island, was 22,800, or 2.8 percent of service-producing employment. While we might not be able to reduce that number very much through educational reform and other changes, the cost of financing K-12 education in this state is very high -- among the highest in the country on a per-pupil basis. Sadly, the "output" resulting from this very high expenditure is less than satisfactory. This points to relatively low productivity, if one were to relate attainment to expenditure. However, this is a very complicated issue. Suffice it to say for now that managing government here, as should be obvious from the situation for local educational employment and expenditure, is far more of a quality issue than one of just quantity.