Rhode Island Employment by Sector at the end of 2010

The table below (click to enlarge) shows employment by sector as of December, 2010 for Rhode Island. I have sorted these from largest to smallest sector. Their values for November of 2010 and December of 2009 are also included. Some persons combine "Accommodation & Food Services" and "Arts, Entertainment & Recreation" into a single category. That combined category would have a rank of #5 as of December, 2010.

From the "top 6," two things should be apparent. First, RI is led by sectors that don't exactly grow at explosive rates during recoveries. Second, in the "top 6" there are several groups that are very cyclically sensitive -- mainly Retail Trade and Manufacturing. While neither of these generated terribly large job gains during the run-up to "The Great Recession," both were able to generate significant declines when things here began to weaken.

How much did employment in each of these sectors change from December of 2009? The next table (click to enlarge) shows this, ranking by the size of the employment change.

Any wonder why RI's economic performance during the present recovery that began in June of 2010 hasn't exactly been stellar?

Let me end on a potentially positive note. I believe very strongly that when the RI DLT releases the revised labor market data for the past two years (in late February), the values in the above tables will be revised higher. How much higher, I can't say at the present time. And, I don't expect the rankings by sector size to change. I truly hope (and expect) that there will be more positive change sectors, whose changes that will not be as anemic as what the available data show today.

Media Coverage of the November 2010 Current Conditions Index

The November Current Conditions Index (the report is given in the prior post and on my website) received coverage in local media. Here is my discussion of the index on Channel 10's Business Talk with Frank Coletta. The Providence Business News, as always, gave very nice coverage to the report as well.

Current Conditions Index: November 2010

After sputtering last month, Rhode Island’s recovery appears to be sustaining itself, although not by very much. In October, the Current Conditions Index fell to 42, a contraction value, as only five of the twelve CCI indicators improved. For November, while there wasn’t great news, there was reassuring news, nonetheless. The November CCI rose to 50, its neutral value, as six of twelve indicators improved. As November is a month where substantial labor market data revisions often occur with data rebenchmarking (we will see this in February), perhaps the last few months of CCI values will be revised higher with the new data. We will have to wait and see. But for November, at least, several CCI indicators had very easy “comps” a year ago, so the index’s rise from October to November might not indicate that we are “out of the woods” yet, in terms of sustaining this recovery.

Retail Sales, one of the foundations upon which Rhode Island’s recovery has been built, improved again in November. It has now increased for nine of the past ten months, reflecting a strong uptrend. Another part of our foundation,Consumer Sentiment, rose after two consecutive decreases. For November, US Consumer Sentiment rose by 6.8 percent. It too remains in an uptrend, having risen for all but one month over the last year. For November, we again witnessed strength in our state’s manufacturing sector. Total Manufacturing Hours rose by 1.1 percent, powered by yet another sharp increase in the length of the workweek. November was the fifth consecutive improvement in this indicator, an anomaly for Rhode Island. Along with this, the Manufacturing Wage rose again, by 3.7 percent.

Two other indicators improved in November. Benefit Exhaustions, which reflects long-term unemployment, fell sharply, dropping by 24.8 percent, its ninth consecutive improvement. Finally, our state’s Unemployment Rate declined again, from 12.5 percent last November to “only” 11.6 percent this November, partly the result of declines in our Labor Force, which fell by 0.1 percent compared to a year ago. Over the month, our Unemployment Rate rose (by 0.2), related in part to a monthly increase in the Labor Force.

The remaining indicators failed to improve. Single-Unit Permits, which reflects new home construction, fell sharply again in November, by 45.7 percent, to an annualized level of only 610 units. New Claims, a leading indicator that measures layoffs, rose at a double-digit rate (by 15.7 percent). It is not clear whether this indicator has begun a prolonged period of increase (non-improvement). Let’s hope it hasn’t. Employment Service Jobs, another leading labor market indicator, fell by 12.5 percent compared to a year ago. Its value has fallen below its recent plateau, another disturbing development. Private Service-Producing Employment fell again (-0.5%). Its rate of decline continues to moderate. Finally, Government Employment declined by 0.2 percent in November, fueled largely by a decrease in local non-education employment. The absence of any future assistance from the federal government should cause its future deterioration.

THE BOTTOM LINE:

Rhode Island's economic recovery remains slow and somewhat tenuous based on existing data. Soon we will see the revisions to the existing labor market data. Hopefully, these will indicate less depressing employment picture. They might even produce some upward CCI revisions. The good news, though, is that things really can't be worse here than they have been. Maybe this recovery isn't as tenuous as existing data seem to indicate.

A Look Back: The Current Conditions Index Since 2006

Sometimes a picture is worth a thousand words, or so the saying goes. The last several years have been very bleak for Rhode Island. Our state weakened then fell into recession well before most other states. At this point, Rhode Island is still in a recovery, or at least I think so, but I will continue to keep my fingers crossed anyway. The Current Conditions Index (CCI) report that will be released next week (and posted here and on my web site) will show exactly what I am referring to.

So, now for the picture. Below is a chart of the CCI since 2006 (click to enlarge). I don't think words do this justice, but I will allow you to judge for yourself.

November Economic Data for Rhode Island

The November data for Rhode Island were somewhat disappointing. The only potential bright spot is that at this time of the year, labor market data have often been far from the actual values, something that ends up being corrected when the data that are later revised (in February with the release of the rebenchmarked labor market data from 2009 forward).

Below is a table of November's actual data (click to enlarge).

Current Conditions Index: October 2010

October marked the first real challenge to Rhode Island’s economic recovery. After surviving its first test in September, sustaining an expansion reading (of 58) with two of the “foundation” indicators failing to improve, October saw the Current Conditions Index fall to 42, a contraction-range reading.Retail Sales, which failed to improve in September, showed a strong increase in October, rising by 5.6 percent. Its upward trend clearly remains intact at this time. But US Consumer Sentiment, another of the elements of our recent “foundation,” failed to improve once again, falling this month by 4.1 percent. To some extent this is not surprising, since it had an extremely difficult “comp” - it rose by 22 percent last October. And, prior to these recent declines, its consecutive improvement streak had been very long. As of now, it does not appear that the trend in this indicator has reversed.

The possibility of trend reversals for several other indicators might be in progress, though. Single Unit Permits, which reflects new home construction, fell sharply in October, by 28 percent, to an annualized rate of only 615 units. While it is not realistic to assume that levels such as this will persist, its “comps” over the next few months will be difficult to beat. So we will likely see some weakness in this indicator for the next several months. A similar behavior might also occur for the Labor Force. This indicator has improved for a very long time, but this string of improvements was linked to the need for unemployed persons to be actively seeking employment to qualify for benefits. As increasing numbers of Rhode Islanders exhaust all benefit entitlement, if they stop actively seeking employment, the Labor Force will decline for months to come. Ironically, the flip side of those changes would be substantial improvements in our state’s Unemployment Rate. Much of the recent decline in our jobless rate has been the result of unemployed persons dropping out of the labor force (October was the sole exception to this of late). So, expect to see further declines in our state’s Unemployment Rate in the coming months. Its effects on the CCI will be exactly offset by declines in the Labor Force, a feature I built into this index from the beginning.

For October, we again witnessed strength in our state’s manufacturing sector. Total Manufacturing Hours rose by 2.2 percent, powered by yet another sharp increase in the length of the workweek. October was the fourth consecutive improvement in this indicator, an anomaly for Rhode Island. Along with this, the Manufacturing Wage rose again, by 3.8 percent. Benefit Exhaustions, which reflects long-term unemployment, fell sharply, dropping by 24.8 percent, its eighth consecutive improvement. But New Claims, a leading indicator that measures layoffs, rose by 4.9 percent, a potentially discouraging development. Employment Service Jobs, another leading labor market indicator, fell by 13.2 percent compared to a year ago, but its value has plateaued since June. Private Service-Producing Employment fell again (-0.8%), its rate of decline moderating. Finally, Government Employment declined by 0.3 percent in October, fueled largely by a decrease in local non-education employment. The likely absence of any future assistance from the federal government should cause future deterioration.

The Bottom Line:

October’s Current Conditions Index reading illustrates just how shallow Rhode Island’s present recovery is. Our relatively slow emergence from “The Great Recession” leaves us with little margin for error. Ongoing state budget deficits, absent any further assistance from the federal government, will keep our state in a largely reactive mode and (too) highly reliant on national growth to sustain this recovery in coming months.

Should We Be Afraid of Rising Interest Rates?

Recently, interest rates have been rising. The 10-year government bond rate, which is highly correlated with mortgage rates, has gone from around 2.5% to 3.0%. Some in the media have been assuming that this is a warning sign of future problems, most notably inflation associated with the Federal Reserve's efforts to push the economy to a faster growth rate (called Quantitative Easing 2, or QE2). In their view, QE2 has not had, nor will it have, much if any positive effects on growth. They presume its effects will be entirely felt with the rate of inflation.

The recent run-up in the stock market, which began when QE2 was first announced, certainly argues against the no growth impact view. What forces generally drive interest rates higher? In general (but not always), interest rate rise for:

• increases in the rate of economic growth;
• higher levels of actual or expected future inflation; and
• monetary tightening.

Note that the first two are often related -- higher growth does at times generate higher inflation.

I don't want this post to be a substantial debate about the direction inflation is going to go, because economists really don't know the answer with much certainty at present. Instead, let me provide you with something to reflect on concerning the speculation by the media that interest rates are rising very sharply -- it is called historical perspective.

The chart shows the 10-year government bond rate since the late 1980s (click to enlarge this image). First thing to note: the value on the right must be divided by 10 to get the actual interest rate. So the most recent value, 30.0, really means a rate of 3.0%.

As this graph shows, while the 10-year bond rate has recently increased, it is very far below either historical values (the high was 8.25% in 1991) and the trend value at present (6.3%).

Recent Interest Rate Increases Have Been Exaggerated by the Media

Is the recent increase something to be worried about? Rates are still extremely low by historical standards at the present time.

So, how likely is it that this rate will jump and approach its current trend value or higher? The way you should approach this is to ask what it would take for this to occur. Don't merely assume that it will occur. In other words, critique what you hear from the media.

Thus, dramatic increases in economic growth or inflation would be required for this to occur, using the three factors above, since monetary policy isn't about to tighten any time soon. I think it is safe to say that the US is not about to move in hyper drive when it comes to economic growth. We are very likely stuck in the 2-3% growth range for some time to come. Will inflation take off? While it is true that the US dollar has weakened somewhat since QE2 began, which causes commodity prices to move higher (this is why gas prices are now at or above $3 per gallon, for example), this by itself isn't enough to fuel a large increase in inflation. Economic strength in developing countries (like China, India, and Brazil) is a major contributor to rising commodity prices, given the recent changes in the value of the US dollar.

The recent increase in the 10-year government bond interest rate is thus related to the acceleration of economic growth -- in both the US (note the improving economic statistics recently) and in developing economies. Recent increases in commodity prices are inflationary. But for inflation to be impacted, these price increases would have to continue through time. Weakness in Europe and Japan will moderate inflation pressure in the coming months, as will ongoing productivity growth, which provides employers with a cushion as input costs are pushed higher by rising commodity prices. Can recent rates of increase in economic growth be sustained here and in developing countries? That remains to be seen.

Persons (and the media) in the US often don't think globally. They attempt to explain everything in terms of what is currently happening in the US. If you want to grasp what is really going on with many important economic variables, like interest rates, it is necessary to consider a global context and several different but related markets. Welcome to the new world!

Third Quarter GDP Report for the US -- Can We Predict This Before the Report is Released?

The revision to third quarter 2010 GDP was released last week. The original estimate, 2.0%, was revised up to 2.5%, a more "respectable" number than the original. In the first release of each quarter's GDP number, inventories, exports, and imports are all approximated. Subsequent months will use available data to eliminate the "educated guesses" contained in the first estimate. That was the case for today's release. Here is a story discussing the GDP release.

As the official GDP releases represent somewhat "stale" data, we can approximate what they will entail using real-time data from asset markets, which has been a central theme of my classes. To do this, go to StockCharts.com and on the middle right select the PerfChart (this stands for Performance Chart) that deals with the sectors of the S&P 500. To save you time and effort, here is the link.

PROCEDURE:
First, choose a bar chart at the bottom left (second button from the left). Then, move the slider (bottom right) to cover the exact time period you desire. Here, I have used the third quarter of 2010.

ANALYSIS:
Observe which sectors have performed better than the S&P 500 index (i.e., outperformed the overall market). This occurs when the S&P 500 button at the top left of the chart is selected.

For the third quarter of 2010, clearly the most cyclically sensitive sectors outperformed the market, with the exception of Financials. Overall, this is a reflection of the growth that occurred during that quarter. Had the defensive sectors (i.e., Consumer Staples, Health Care, and Utilities) outperformed, this would have signaled a potentially weakening economy.

Can this analysis be used to help predict the GDP report before it is actually released? The answer is yes. Asset markets, one of which is the stock market, are leading indicators, which means they tend to move in advance of changes in other parts of the economy. So, current changes in leading economic indicators tend to signal future changes we can expect to observe in the overall economy.

What is the stock market (and its sectors) telling us about the fourth quarter rate of economic growth? The second chart (click to enlarge) shows market performance since October 1. Other than Energy and Consumer Discretionary stocks (which themselves are cyclical), the remainder of cyclical indicators are performing less well than they did in the third quarter. The apparent message is that economic growth in the fourth quarter will be slower than it was in Q3, or spotty at best in comparison.

There are two things that should be noted. First, there is no indication that economic growth will become negative in Q4. Second, the slowing of economic growth these sectors seem to be indicting also affects the defensive sectors, so they are more negative than they were in Q3. Part of this no doubt reflects ongoing worries about the US housing market and the economic stability and solvency of several European countries as well (Ireland, Portugal, Spain, Italy, and Greece, sometimes referred to as the PIIGS, using their first letters). Will economic weakness in Europe diminish the recent momentum the US has been experiencing? The market apparently believe that this is likely.

Let me suggest that you continue to follow the sectors as we move farther into the fourth quarter and see what the market is suggesting. We won't get the initial Q4 GDP data until late in January, so this should be informative in advance of the formal data in January (that will be stale at that point).

September Current Conditions Index Report (for historical reports and this report as PDF files go to: http://members.cox.net/lardaro/current.htm

Rhode Island’s recovery continued in September, its fourth month. While the value of the Current Conditions Index remained at 58 this month, the list of indicators that improved changed somewhat. While Retail Sales and US Consumer Sentiment have both shown improvement for quite some time now, fundamental to helping the CCI to form its base in the expanding range, both failed to improve in September.  The fact that the CCI was able to remain in the expanding range in spite of both indicators failing to improve is a very positive sign for Rhode Island. Declines like this are not uncommon for indicators that have improved consecutively for many months. This most likely reflects a “pause” for both indicators, as their uptrends remain intact at this point. Improving economic momentum at the national level should benefit both of these in the coming months.

September’s economic data were more positive than the CCI’s value of 58 would appear to indicate. On a monthly basis, eleven of the twelve CCI indicators either improved or were close to improving. Once again, strength in our state’s manufacturing sector led the way, as its rebound continued. Total Manufacturing Hours rose again (+0.9%), powered by yet another sharp increase in the length of the workweek. This indicator has now improved for the last three months, something Rhode Island hasn’t seen since the year 2000. Along with this improvement in Total Manufacturing Hours, the Manufacturing Wage rose gain by a greater than 4 percent rate (+4.2%). The other part of our goods producing sector (Mining doesn’t matter here), Single-Unit Permits, which reflects new home construction, continued its recent roller coaster behavior, rising by 16 percent compared to last September. As noted earlier, Retail Sales failed to improve in September, declining by 2.7 percent compared to a year ago, its first decline in the last eight months. Along with this, US Consumer Sentiment fell (-7.5%), breaking a string of seventeen consecutive improvements.

Our state’s Labor Force rose again, increasing by 0.2 percent compared to a year ago.  While our Unemployment Rate fell to 11.5 percent from August’s value of 11.8, this was once again at least partially the result of monthly declines in our   Labor Force. Benefit Exhaustions, which reflects long-term unemployment, fell sharply again, dropping by 31.2 percent in September, its seventh consecutive improvement. New Claims, a leading indicator that measures layoffs, fell by 2.4 percent versus last September, further erasing the effects of recent consecutive increases. While Employment Service Jobs, another leading labor market indicator, fell by 11.6 percent compared to a year ago, on a monthly basis, this indicator appears to have plateaued since June. Stabilization in this indicator will be critical to sustaining Rhode Island’s newly found recovery momentum. Private Service-Producing Employment fell again (-1.2%), with its rate of decline accelerating slightly in September. Finally, Government Employment declined in September, by 0.2 percent, fueled largely by a decrease in local non-education employment. While visual examination of the data for this indicator seems to show a leveling off, Rhode Island’s persistent deficit woes coupled with the likely absence of any future help from the federal government should cause its eventual deterioration.

THE BOTTOM LINE:

September was month four for Rhode Island’s current recovery. While CCI readings remained at 58, barely into the expansion range, the fact that this value was sustained in spite of declines in two indicators that had led the way into recovery is encouraging, as is recent national economic momentum. At this point, let’s hope that this momentum can be sustained, especially as the next fiscal year approaches.

September 2010 Data

The September data for Rhode Island show an economy that is continuing to improve. The table below (click to enlarge) gives the values for a number of key variables. Note that a number of the values from last September were fairly weak, making them easy "comps" and not too difficult to beat. Most notably, two of our strongest performers of late, Retail Sales and US Consumer Sentiment, failed to improve in September from a year ago. But other variables stepped in to take their place among improving parts of our economy.

Happily, I can say that Rhode Island's current recovery, which began in June of this year, has continued through September and shows no signs of disappearing.