Sunday, September 25, 2011
NEW WEB PAGE ADDRESS
I have moved the location for my web page from http://members.cox.net/lardaro to http://www.llardaro.com. Please change this in your bookmarks. My full Current Conditions Index reports will be published there each month from this time forward. PDF files of past reports will also be available there.
Tuesday, September 13, 2011
Current Conditions Index: July 2011
Rhode Island started the third quarter on a mixed
note. The good news is that the Current Conditions Index for July rose to 67
from its value of 58 in June. That is the highest CCI reading since February of
this year. The bad news is that in spite of this higher reading for July, the
CCI once again registered a value below its level one year ago. As of July, the
Current Conditions Index has failed to beat its year-earlier value for five
consecutive months. So, while Rhode Island’s present recovery is continuing,
the rate of improvement in the overall level of economic
activity continues to moderate.
Make no mistake about it, though, Rhode Island’s
economy continues to grow as it has through all of 2011. This recovery will be
eighteen months old in August. As I noted last month, the positive economic
momentum this has afforded us will provide us with some margin for error in
dealing with whatever weakness lies ahead. “The” question, however, continues
to be what will happen nationally — will the US experience a double-dip
recession?
In July, the trends in several key indicators
continued to deviate from what we will need them to be if growth is to
re-accelerate. Our Labor Force has now declined or failed to
improve on a year-over-year basis for the last six months. Worse yet, on a
monthly basis, the decline extends all the way back to last December. This, of
course, casts doubt on the validity of the “signal” provided by recent declines
in our Unemployment Rate.
At this point, I recommend not attempting to gauge the overall strength of
Rhode Island’s economy by the behavior of our state’s Unemployment Rate.
Not only is this indicator losing some of its statistical meaningfulness, it is a lagging indicator as well. The
number of Employment Service Jobs,
a leading labor market indicator that includes “temps,” has fallen for the past
five months, although its comp last July was very difficult to beat. Along with
this, US Consumer Sentiment fell by another 5.3 percent versus
last July. While much of this is related to the total dysfunction of our
nation’s legislative branch, its effects are nonetheless spilling over into
other elements of economic activity.
Fortunately, not everything is moving toward
unfavorable trends. The spectacular and (to me at least) unexpected ongoing
strength in our state’s manufacturing sector continued in July. Total
Manufacturing Hours (+3.2%
in July) has now improved for the last thirteen months. Both employment and
hours rose in July. Growth in the Manufacturing Wage went parabolic in July, rising by 12.8
percent compared to a year ago. Clearly, sustaining our state’s recent
manufacturing momentum will require continued dollar weakness, which, given
federal government dysfunction, is likely to continue. Private
Service-Producing Employment rose
by 2.2 percent in July, its highest growth rate since October. Sadly, the
benefits of this change were offset by another sharp decline inGovernment Employment (-3.0%).
Retail Sales rose by 1.8 percent in
July, its fourth improvement in the last five months. New
Claims, a leading labor market indicator that indicates
layoffs, fell by only 0.4 percent this month, but that was its seventh
consecutive improvement. Single-Unit Permits, which reflects new home
construction, rose by 1.4 percent in July, its first improvement in a while,
although the number of permits remains extremely low. Finally, Benefit
Exhaustions, which measures long-term unemployment, declined by
14.4 percent, sustaining its overall downtrend.
Saturday, September 3, 2011
This Week
I always try to make at least one post per week on this Blog. Unfortunately, I have Cox bundle service, so all of my Cox services, most notably the Internet, have been non-existent since last Sunday at 9am. Apparently, I live on "the block that Cox forgot." This whole experience has been like having to deal with the Rhode Island's DMV on the home-base level! I call every morning, talk to Cox's tech support, who after thinking my service had been restored, suddenly "discover" that 20 homes on my street remain without any service. I always get the same: "Hopefully your service will be restored by tonight" response. Yeah, but in the long-run, we're all dead! Thank God I have an iPhone (obviously not with Cox), so I can make calls while my Cox phone service "sleeps." And, I am writing this blog post from Starbucks in Wakefield.
As I have been reflecting on all of this and trying to remain constructive, I am VERY thankful that my home, and all of my street, have power. Those who still don't have power are the ones who are truly suffering.
There are a few things I have been contemplating, given all the time I now have on my hands. First, what if Irene had actually been a hurricane, with sustained winds of 70+ mph? Why did a tropical storm do this much damage throughout this state? I'm not buying the duration of winds argument at this point.
Second, my experience in this instance has fortunately been restricted to dealings with the private sector, where alternatives exist if I am unhappy with my existing service. Were this instead related to one of the roughly half of our state's legislators who run unopposed, I would not have had any option for making a change (unless, of course, that person were to commit a felony). Sadly, while the other half of the legislature has opposition, they often end up being re-elected in spite of relatively few accomplishments or problems voters here might have with them. Rhode Island residents are all too willing to complain, but when it comes time to taking action in terms of voting against an incumbent whom one dislikes, this very seldom occurs. Even worse, very few persons here actually bother to vote, even though they are registered!
Why the dichotomy? People would no doubt respond that with Cox, or any private-sector company for that matter, there is actual money on the line. Actually, there is a far greater cost here than one might realize. Permit me to inject a bit of economics here. The cost of anything potentially consists of two parts, the direct or explicit cost, what we actually pay, and the indirect or implicit cost where time is involved in consuming a good or service. In my situation, even though I can get a credit from Cox for service time lost, this will only offset the explicit portion of total cost. The implicit cost, which is related to lost phone calls, Internet, and television (I missed reports on the disastrous employment report yesterday), involves chunks of time because I have been forced to seek alternative ways of having these services. These implicit costs have now become quite high as I move ever closer to the one-week mark. So, contrary to intuition, receiving a credit does not provide total compensation for the services I have lost, anymore than it reflects the total cost involved.
Let me end by moving once again to the statewide level. If anyone is naive enough to believe that retaining incumbent legislators whom persons don't really support is without cost, guess again. There is both the explicit cost, of being forced to pay higher taxes than we should pay given the quality of public services and leadership here, and the implicit cost of the lost time due to our state's celebrated atmosphere of excessive business regulations, time waiting at places like the DMV (blame the system set up, not the workers for this), and the list goes on and on and on. I'll leave it to you to guess which cost, explicit or implicit here, is larger.
As I have been reflecting on all of this and trying to remain constructive, I am VERY thankful that my home, and all of my street, have power. Those who still don't have power are the ones who are truly suffering.
There are a few things I have been contemplating, given all the time I now have on my hands. First, what if Irene had actually been a hurricane, with sustained winds of 70+ mph? Why did a tropical storm do this much damage throughout this state? I'm not buying the duration of winds argument at this point.
Second, my experience in this instance has fortunately been restricted to dealings with the private sector, where alternatives exist if I am unhappy with my existing service. Were this instead related to one of the roughly half of our state's legislators who run unopposed, I would not have had any option for making a change (unless, of course, that person were to commit a felony). Sadly, while the other half of the legislature has opposition, they often end up being re-elected in spite of relatively few accomplishments or problems voters here might have with them. Rhode Island residents are all too willing to complain, but when it comes time to taking action in terms of voting against an incumbent whom one dislikes, this very seldom occurs. Even worse, very few persons here actually bother to vote, even though they are registered!
Why the dichotomy? People would no doubt respond that with Cox, or any private-sector company for that matter, there is actual money on the line. Actually, there is a far greater cost here than one might realize. Permit me to inject a bit of economics here. The cost of anything potentially consists of two parts, the direct or explicit cost, what we actually pay, and the indirect or implicit cost where time is involved in consuming a good or service. In my situation, even though I can get a credit from Cox for service time lost, this will only offset the explicit portion of total cost. The implicit cost, which is related to lost phone calls, Internet, and television (I missed reports on the disastrous employment report yesterday), involves chunks of time because I have been forced to seek alternative ways of having these services. These implicit costs have now become quite high as I move ever closer to the one-week mark. So, contrary to intuition, receiving a credit does not provide total compensation for the services I have lost, anymore than it reflects the total cost involved.
Let me end by moving once again to the statewide level. If anyone is naive enough to believe that retaining incumbent legislators whom persons don't really support is without cost, guess again. There is both the explicit cost, of being forced to pay higher taxes than we should pay given the quality of public services and leadership here, and the implicit cost of the lost time due to our state's celebrated atmosphere of excessive business regulations, time waiting at places like the DMV (blame the system set up, not the workers for this), and the list goes on and on and on. I'll leave it to you to guess which cost, explicit or implicit here, is larger.
Thursday, August 25, 2011
Thoughts on Following the Stock Market
As this is a blog about economics and the Rhode Island economy, it's time for me to discuss some basic economics. As you are no doubt aware, the stock market has been correcting of late and it has become extremely volatile on a day-to-day basis. This has inevitably lead to both panic and confusion for the everyday investor. What should you do? How can you better understand all the things that are going on?
These are very important questions, ones that clearly need to be addressed. In this post, I will make a few recommendations on reading material, and introduce a several concepts that will help you navigate your way through all of this.
First, let me recommend an excellent book that will provide you with a basic framework for following the stock market in general: Fire Your Stock Analyst (2nd edition) by Harry Domash. I suspect this will be the best $20 you spend in a long, long time. It is not one of the all-too-plentiful "how to make $1 million" books. I find those to be totally worthless (except to the authors)! Domash's text will provide you with a foundation you can build on, by providing a meaningful basis for you to begin understanding how stock prices are determined and how they change.
I also recommend that you use some website or brokerage site that will allow you to graph any stock (or ETF or mutual fund) that you own, or are considering purchasing. For stocks that you already own, look at its chart on both a daily and weekly basis (different time frames are important for perspective). If you are also able to generate monthly charts, all the better.
This leads me to a second book recommendation: STIKKI Stock Charts. Yes, the spelling is correct. This book, which costs $12,will open your eyes to another dimension of following the stock market: don't just focus on closing prices. Over a single time period, whether it be a day, a week, or a month, price will vary over a range. Therefore, information is available on not only the closing price, but on the opening price, the high over that period, and the low. STIKKI Stock Charts illustrates this effortlessly, providing you with numerous examples, so that in about an hour, you will see that there is a lot more going on than you had been aware of before.
Beyond these reference books, there is a pair of very simple concepts, frequently discussed in the media, that you need to know and understand. I am referring to support and resistance. What is interesting about all of this, is the fact that market prices are determined by supply and demand. There is nothing mythical in any of this.
SUPPORT: when stock prices fall, they almost never fall to zero. They generally move to a level where people collectively believe they are unlikely to fall much farther. At this lower level, the stock will often become viewed as being reasonably priced, or even a bargain. Once this lower price is reached, buying pressure, or demand, begins to overpower selling pressure, or supply. The result, is that price stops declining and may well begin to increase. This lower-level for price is referred to as support. You should use lows as the basis for determining support.
RESISTANCE: when stock prices rise, they eventually move to a level where the stock is viewed as being pricey, or not likely to rise much in the future. At this higher level, the stock's price is considered overvalued, or too expensive. So, once this higher prices reached, sellers, or supply, begin to overpower buyers, or demand. As a result, price will and it's increase and may well start to decline. This higher price level is called resistance. You should use highs as the basis for resistance.
Both of these concepts are discussed all the time in the media. You need to be aware of what they are, so you know understand what is being discussed.While you might not realize it, these two concepts are the basis for several things that you often see "prognosticated."
The first of these is the notion of "buy low and sell high." Support and resistance provide us with an operational basis for defining "low" and "high" prices. "Buy low "should mean purchasing a stock when its price is at or near the support. This assumes, of course, that support will hold. And that will ultimately depend on factors such as how well the economy is doing, factors specific to an industry or sector, etc. "Sell high" should mean selling a stock when its price gets close to or at resistance, assuming that resistance holds. Whether or not it holds depends on factors similar to those that determine the support.
The one thing I never hear discussed in the media is that you should avoid putting all your money into or pulling all of your money out of the market at one time. Instead, you should scale into or out of investments. And, you can use support and resistance to help you with this. For example, if stock price has been rising and is starting to move closer to resistance, that might be a good time to sell some of your shares and take profit on them, thus scaling out. You can do this in steps, as well. Similarly, if price has been falling, and it is moving closer to support, you might begin to scale into that stock, purchasing a fraction of the total you might want ultimately invested. So, if support doesn't hold, and price drops farther than you originally anticipated, you won't have all your money on the line, only some of it, which should help you cushion losses.
The second notion related to support and resistance details how far stock price is likely to fall or rise. Did you ever wonder where the analysts come up with these numbers? Do they go into the desert for 40 days and 40 nights, or is there some other process at work? While there are different ways this can be done, technical analysis, which I have been discussing here, has a fairly straightforward way of answering this question, one that is almost always the basis for what you hear in the media.
Q: How far is price likely to fall?
Translation: Where is the next level of support?
Q: How far is price likely to rise?
Translation: Where is the next level of resistance?
Let me clarify this a bit by providing a chart of Gold prices over the past three months (click to enlarge), using the open-high-low-close framework (refer to Stikki Stock Charts).
Clearly, gold price has been in a sharp uptrend since early July. The pace of that uptrend went "parabolic" in early August. Looking at the end of the recent upturn, resistance was established over the August 8 - 20 period at around $1,825. Gold price went above resistance (a breakout), but that breakout was not sustainable, so gold price corrected (parabolic price moves mean too far, too fast). How much might gold price decline? First, nobody knows that with perfect certainty. Using this framework, in the near term, look at early August support, $1,725. Should that level not hold, the next support, shown above, is from very early August, $1,675. I'll leave it to you to find the next lower level of support from the chart.
Let me conclude with one other element of technical analysis. Should the price of gold begin to move higher again, and I believe it ultimately will, how high is it likely to go? To answer this, determine resistance levels. Note, interestingly (to me, at least) that PRIOR SUPPORT LEVELS WILL NOW DEFINE RESISTANCE!
These are very important questions, ones that clearly need to be addressed. In this post, I will make a few recommendations on reading material, and introduce a several concepts that will help you navigate your way through all of this.
First, let me recommend an excellent book that will provide you with a basic framework for following the stock market in general: Fire Your Stock Analyst (2nd edition) by Harry Domash. I suspect this will be the best $20 you spend in a long, long time. It is not one of the all-too-plentiful "how to make $1 million" books. I find those to be totally worthless (except to the authors)! Domash's text will provide you with a foundation you can build on, by providing a meaningful basis for you to begin understanding how stock prices are determined and how they change.
I also recommend that you use some website or brokerage site that will allow you to graph any stock (or ETF or mutual fund) that you own, or are considering purchasing. For stocks that you already own, look at its chart on both a daily and weekly basis (different time frames are important for perspective). If you are also able to generate monthly charts, all the better.
This leads me to a second book recommendation: STIKKI Stock Charts. Yes, the spelling is correct. This book, which costs $12,will open your eyes to another dimension of following the stock market: don't just focus on closing prices. Over a single time period, whether it be a day, a week, or a month, price will vary over a range. Therefore, information is available on not only the closing price, but on the opening price, the high over that period, and the low. STIKKI Stock Charts illustrates this effortlessly, providing you with numerous examples, so that in about an hour, you will see that there is a lot more going on than you had been aware of before.
Beyond these reference books, there is a pair of very simple concepts, frequently discussed in the media, that you need to know and understand. I am referring to support and resistance. What is interesting about all of this, is the fact that market prices are determined by supply and demand. There is nothing mythical in any of this.
SUPPORT: when stock prices fall, they almost never fall to zero. They generally move to a level where people collectively believe they are unlikely to fall much farther. At this lower level, the stock will often become viewed as being reasonably priced, or even a bargain. Once this lower price is reached, buying pressure, or demand, begins to overpower selling pressure, or supply. The result, is that price stops declining and may well begin to increase. This lower-level for price is referred to as support. You should use lows as the basis for determining support.
RESISTANCE: when stock prices rise, they eventually move to a level where the stock is viewed as being pricey, or not likely to rise much in the future. At this higher level, the stock's price is considered overvalued, or too expensive. So, once this higher prices reached, sellers, or supply, begin to overpower buyers, or demand. As a result, price will and it's increase and may well start to decline. This higher price level is called resistance. You should use highs as the basis for resistance.
Both of these concepts are discussed all the time in the media. You need to be aware of what they are, so you know understand what is being discussed.While you might not realize it, these two concepts are the basis for several things that you often see "prognosticated."
The first of these is the notion of "buy low and sell high." Support and resistance provide us with an operational basis for defining "low" and "high" prices. "Buy low "should mean purchasing a stock when its price is at or near the support. This assumes, of course, that support will hold. And that will ultimately depend on factors such as how well the economy is doing, factors specific to an industry or sector, etc. "Sell high" should mean selling a stock when its price gets close to or at resistance, assuming that resistance holds. Whether or not it holds depends on factors similar to those that determine the support.
The one thing I never hear discussed in the media is that you should avoid putting all your money into or pulling all of your money out of the market at one time. Instead, you should scale into or out of investments. And, you can use support and resistance to help you with this. For example, if stock price has been rising and is starting to move closer to resistance, that might be a good time to sell some of your shares and take profit on them, thus scaling out. You can do this in steps, as well. Similarly, if price has been falling, and it is moving closer to support, you might begin to scale into that stock, purchasing a fraction of the total you might want ultimately invested. So, if support doesn't hold, and price drops farther than you originally anticipated, you won't have all your money on the line, only some of it, which should help you cushion losses.
The second notion related to support and resistance details how far stock price is likely to fall or rise. Did you ever wonder where the analysts come up with these numbers? Do they go into the desert for 40 days and 40 nights, or is there some other process at work? While there are different ways this can be done, technical analysis, which I have been discussing here, has a fairly straightforward way of answering this question, one that is almost always the basis for what you hear in the media.
Q: How far is price likely to fall?
Translation: Where is the next level of support?
Q: How far is price likely to rise?
Translation: Where is the next level of resistance?
Let me clarify this a bit by providing a chart of Gold prices over the past three months (click to enlarge), using the open-high-low-close framework (refer to Stikki Stock Charts).
Clearly, gold price has been in a sharp uptrend since early July. The pace of that uptrend went "parabolic" in early August. Looking at the end of the recent upturn, resistance was established over the August 8 - 20 period at around $1,825. Gold price went above resistance (a breakout), but that breakout was not sustainable, so gold price corrected (parabolic price moves mean too far, too fast). How much might gold price decline? First, nobody knows that with perfect certainty. Using this framework, in the near term, look at early August support, $1,725. Should that level not hold, the next support, shown above, is from very early August, $1,675. I'll leave it to you to find the next lower level of support from the chart.
Let me conclude with one other element of technical analysis. Should the price of gold begin to move higher again, and I believe it ultimately will, how high is it likely to go? To answer this, determine resistance levels. Note, interestingly (to me, at least) that PRIOR SUPPORT LEVELS WILL NOW DEFINE RESISTANCE!
Tuesday, August 16, 2011
Recent Media Appearances
Over the past few weeks I have made a several media appearances and my monthly indicator was covered locally.
On August 8, I was on WPRO radio with Buddy Cianci where I spoke about the stock market's recent volatile behavior. I was also on WHJJ with Helen Glover, where we discussed the US debt downgrade, and WPRO with Tara and Andrew, where we talked about the progress of Rhode Island's economy.
This week, I released the June Current Conditions Index report (see previous post and my web site). It was given excellent coverage, as has been the case for a while now, in both the Providence Business News and GOLOCALProv.com. On Monday, August 15th, I was interviewed by Bill Rapley of Channel 10 about Rhode Island's economic status and made my monthly appearance the next day on Channel 10 with Mario Hilario this month to present the June Current Conditions Index and its implications for Rhode Island.
On August 8, I was on WPRO radio with Buddy Cianci where I spoke about the stock market's recent volatile behavior. I was also on WHJJ with Helen Glover, where we discussed the US debt downgrade, and WPRO with Tara and Andrew, where we talked about the progress of Rhode Island's economy.
This week, I released the June Current Conditions Index report (see previous post and my web site). It was given excellent coverage, as has been the case for a while now, in both the Providence Business News and GOLOCALProv.com. On Monday, August 15th, I was interviewed by Bill Rapley of Channel 10 about Rhode Island's economic status and made my monthly appearance the next day on Channel 10 with Mario Hilario this month to present the June Current Conditions Index and its implications for Rhode Island.
Current Conditions Index: June 2011
This post contains most of the June Current Conditions Index report, but it excludes the data table and The Bottom Line. If you would like to see the entire report as well as previous reports (in PDF format), go to my web site.
It looks like déjà vu all over again! Until only a few months ago, using labor market data from the prior rebenchmarking, the Current Conditions Index was apparently stuck between values of 50 and 58, leading me to wonder whether this recovery would continue or if Rhode Island’s economy was about to stall. Then, in February, the new labor market data were released. I was pleasantly surprised to learn that not only had Rhode Island’s economy been in a recovery longer than I had been led to believe, but that the actual levels of economic activity were substantially stronger as well. Now, only a few months after receiving this revised data, Rhode Island finds itself in essentially the same situation we thought it was in prior to the release of the new data.
Clearly, Rhode Island’s economy has slowed since the end of the first quarter of this year. And, based on a revision to Retail Sales data from last month, the CCI fell to its neutral value of 50 during May. Thankfully, it returned back to 58 in June, but during the second quarter, Rhode Island’s rate of growth plateaued, moving us uncomfortably close to reaching stall speed. As of June, the CCI has now failed to exceed its year-earlier value for four consecutive months. At times like this, when our state’s economy is slowing, it is important to keep in mind that Rhode Island is still in a recovery, and that the current recovery is moving closer to the eighteen month mark. So, Rhode Island does have positive momentum and some margin for error with which to counter whatever weakness lies ahead. The ultimate question, of course, is what happens nationally throughout the remainder of this year.
As I noted in last month’s report, the trends in several indicators have changed in ways that will make it more difficult for our rate of growth to increase. Our Labor Force has now declined or failed to improve for the last five months, making recent declines in our Unemployment Rate somewhat suspect. The number of Employment Service Jobs, a leading labor market indicator that includes “temps,” has fallen for the past four months. Along with all of this has been one particular surprise: strength in our state’s manufacturing sector. Total Manufacturing Hours has now improved for the last twelve months, something I thought I would never see again. And, growth in the Manufacturing Wage growth has accelerated to well over five percent for the past two months. Will the substantial momentum provided by this sector continue? Let’s hope the dollar doesn’t strengthen very much from here.
Thursday, August 11, 2011
The Role of Growth in the Debt Crisis
For the first time since 1917, the US no longer has the highest possible credit rating, AAA. As everyone knows by now, last Friday, shortly after the stock market closed, S&P reduced its rating of US debt to AA+, its second highest ranking, based on a combination of the political wrangling involved with the way the US conducted itself during the debt/deficit deal process, the deal itself (deferred cuts + smoke and mirrors), and the economic prospects for the US moving forward.
Critical to all of this is the likely trajectory of the future debt burden on the US economy, which clearly impacts our ability to afford this debt. But how is debt burden defined? As a basic economic tenet, this is defined in relative terms -- the debt relative to our country's ability to afford it. Our ability to afford it, or ability to pay, is predicted on GDP, the value of final goods and services produced in the US. So, the focus of whether we can afford to pay our debt in the future is defined based on the Debt to GDP Ratio:
This is not unlike what your credit worthiness is evaluated based on if (say) you apply for an auto loan: what percentage of your income (which works like GDP here) will the payments (debt) account for? Generally, if this ratio exceeds 28%, you'll be instructed not to forget to close the door on your way out -- application over! The lower is the relevant ratio, or debt relative to the ability to pay it, the more credit worthy the person or country is deemed to be.
Permit me to digress to an algebraic result at this point: through time, this ratio falls when debt grows more slowly than GDP. In other words, economic growth (the change in GDP) must outpace increases in debt for debt burden to decrease through time. So far, so good. The problem is that things get much more complicated because changes in the rate of growth themselves alter national debt by changing the federal budget.
Consider what happens when the rate of economic growth falls, either during recessions or periods of slowing growth. The way our fiscal system is designed, two critical elements automatically impact the federal budget: progressive income taxation; and entitlement spending for programs such as unemployment insurance or welfare.
The overall result is that the federal budget either has a smaller surplus (yeah, right!) or a larger deficit when economic activity deteriorates. More importantly, the larger deficit then adds to the national debt. The result is a greater debt to GDP ratio. As this shows, changes in the national debt are necessarily linked to changes in the rate of economic growth.
In light of this, what do governments often attempt to do? Pad the denominator -- overstate likely rates of future economic growth, making the debt appear to be less of a burden than it will actually prove to be. Actually, there is an added bonus to doing this: based on what I outlined above, if the rate of economic growth is overstated, tax revenue will also be overstated ("smoke"), while entitlement spending will be understated ("mirrors"), making the deficit, and thus the change in debt, appear to be smaller than it will eventually turn out to be!
The problem is, you can only get away with this for so long. Eventually, either voters or rating agencies will figure out what's been going on. That's when the party ends!
Of course, there are lots of other fiscal tricks that have been utilized by our government for quite some time now. I won't get into those now, but they often consist of deferring future cuts or revenue changes, assuming that these will definitely occur when assumed. This is essentially what the first round of debt reduction did.
Perhaps had the recent political process dealing with this not been such a fiasco, we might have continued to get away with these practices and gimmicks. While two of the rating agencies did not deem our debt and this process to be problematic, the S&P finally had enough, making the downgrade call. Interestingly, S&P also made mathematical errors in their determination our creditworthiness. Apparently their mind was already made up - they refused to be confused by the facts! They claimed that it was just merely a matter of different assumptions in future years. Obviously, the effects of padding exist in both directions -- symmetrical fudge factors!
Instead of arguing with S&P's decision, I prefer to view it as a very necessary wake-up call to our nation and its leaders. We have to change and to abandon the pervasive use of "smoke and mirrors." Remember, the S&P rating was not only a downgrade, it included a negative outlook as well. So, if the "committee of twelve" does what appears to be likely, more theatrics and gridlock, the US could be downgraded even further by S&P. And, I don't rule out possible downgrades by either or both of the other ratings agencies.
At the top of my holiday wish list is one very prominent wish: that members of the US House of Representatives stop acting like a bunch of spoiled three year olds, and that they finally place the good of our country ahead of their fragile egos. Unfortunately, this is not likely to be the case. As we have now begun the move toward "round two" of the debt ceiling process, the markets yesterday were rather unequivocal -- they tanked today just after hearing the list of persons who will make up the group of twelve that will potentially decide the next round of spending cuts. Unless a miracle occurs, this group will almost certainly end up deadlocked, resulting in mandatory cuts being put into place -- but they only go into effect after the election. Here we go again!
Critical to all of this is the likely trajectory of the future debt burden on the US economy, which clearly impacts our ability to afford this debt. But how is debt burden defined? As a basic economic tenet, this is defined in relative terms -- the debt relative to our country's ability to afford it. Our ability to afford it, or ability to pay, is predicted on GDP, the value of final goods and services produced in the US. So, the focus of whether we can afford to pay our debt in the future is defined based on the Debt to GDP Ratio:
Debt to GDP Ratio = National Debt/GDP
This is not unlike what your credit worthiness is evaluated based on if (say) you apply for an auto loan: what percentage of your income (which works like GDP here) will the payments (debt) account for? Generally, if this ratio exceeds 28%, you'll be instructed not to forget to close the door on your way out -- application over! The lower is the relevant ratio, or debt relative to the ability to pay it, the more credit worthy the person or country is deemed to be.
Permit me to digress to an algebraic result at this point: through time, this ratio falls when debt grows more slowly than GDP. In other words, economic growth (the change in GDP) must outpace increases in debt for debt burden to decrease through time. So far, so good. The problem is that things get much more complicated because changes in the rate of growth themselves alter national debt by changing the federal budget.
Consider what happens when the rate of economic growth falls, either during recessions or periods of slowing growth. The way our fiscal system is designed, two critical elements automatically impact the federal budget: progressive income taxation; and entitlement spending for programs such as unemployment insurance or welfare.
- In a slowing economy or a recession, income tax revenue automatically falls, as there is now less income available to tax (the result of layoffs, reduced hours, etc.).
- At the same time, more persons qualify for entitlement programs such as unemployment insurance, automatically raising the amount spent by those programs. (FYI: the reason these are called entitlement programs is that the government only sets the criteria for entitlement, not the actual amount spent in any year. That is determined by how well or badly the economy does.)
- Entitlement spending is countercyclical, meaning that it rises when the level of economic activity falls (such as in recessions), and falls when economic activity improves (in recoveries).
The overall result is that the federal budget either has a smaller surplus (yeah, right!) or a larger deficit when economic activity deteriorates. More importantly, the larger deficit then adds to the national debt. The result is a greater debt to GDP ratio. As this shows, changes in the national debt are necessarily linked to changes in the rate of economic growth.
In light of this, what do governments often attempt to do? Pad the denominator -- overstate likely rates of future economic growth, making the debt appear to be less of a burden than it will actually prove to be. Actually, there is an added bonus to doing this: based on what I outlined above, if the rate of economic growth is overstated, tax revenue will also be overstated ("smoke"), while entitlement spending will be understated ("mirrors"), making the deficit, and thus the change in debt, appear to be smaller than it will eventually turn out to be!
The problem is, you can only get away with this for so long. Eventually, either voters or rating agencies will figure out what's been going on. That's when the party ends!
Of course, there are lots of other fiscal tricks that have been utilized by our government for quite some time now. I won't get into those now, but they often consist of deferring future cuts or revenue changes, assuming that these will definitely occur when assumed. This is essentially what the first round of debt reduction did.
Perhaps had the recent political process dealing with this not been such a fiasco, we might have continued to get away with these practices and gimmicks. While two of the rating agencies did not deem our debt and this process to be problematic, the S&P finally had enough, making the downgrade call. Interestingly, S&P also made mathematical errors in their determination our creditworthiness. Apparently their mind was already made up - they refused to be confused by the facts! They claimed that it was just merely a matter of different assumptions in future years. Obviously, the effects of padding exist in both directions -- symmetrical fudge factors!
Instead of arguing with S&P's decision, I prefer to view it as a very necessary wake-up call to our nation and its leaders. We have to change and to abandon the pervasive use of "smoke and mirrors." Remember, the S&P rating was not only a downgrade, it included a negative outlook as well. So, if the "committee of twelve" does what appears to be likely, more theatrics and gridlock, the US could be downgraded even further by S&P. And, I don't rule out possible downgrades by either or both of the other ratings agencies.
At the top of my holiday wish list is one very prominent wish: that members of the US House of Representatives stop acting like a bunch of spoiled three year olds, and that they finally place the good of our country ahead of their fragile egos. Unfortunately, this is not likely to be the case. As we have now begun the move toward "round two" of the debt ceiling process, the markets yesterday were rather unequivocal -- they tanked today just after hearing the list of persons who will make up the group of twelve that will potentially decide the next round of spending cuts. Unless a miracle occurs, this group will almost certainly end up deadlocked, resulting in mandatory cuts being put into place -- but they only go into effect after the election. Here we go again!
Tuesday, July 26, 2011
Our State's Jobless Rate is Declining. Is That Good News?
In recent months, Rhode Island's unemployment has been falling. In fact, whenever the monthly labor market numbers are released, the local media focus largely, if not entirely, on the unemployment rate and how it changed. So, based on these recent declines, Rhode Island's economy must be doing noticeably better. Or is it?
First, it is critical that this statistic be viewed in relative, not absolute, terms. While Rhode Island's unemployment rate has fallen from 11.5 percent, its level from August through December of 2010, to 10.8 percent in June of 2011, it remains the third highest in the entire US! So, Rhode Island continues to be known for its beautiful beaches and its very high unemployment rate. Quite a niche, isn't it? Let me also state for the record that I don't believe that our state's jobless rate was constant over that long of a period. The single value for the entire August to December of 2010 period is doubtless the result of a smoothing procedure utilized by the US Department of Labor.
Second, we must not forget to consider the way the unemployment rate itself is calculated. To be counted as unemployed, and therefore part of the monthly statistic, an unemployed person must be unemployed (obviously), physically able to work, and this is the kicker, actively seeking employment. What that last condition indicates is that it is quite possible for the unemployment rate the fall not as the result of higher employment, as most people think has to be the case, but because unemployed persons opt to cease their active job search. In economics, this is known as the "discouraged worker effect." Actually, that's a pretty dumb name, since these people obviously aren't working and they're well beyond being discouraged. So, if an unemployed person stops actively seeking employment, that person is no longer counted as being part of the labor force, and is therefore not counted as being among the "officially" unemployed. In light of all of this, you should always view the unemployment rate and labor force participation together. Has this odd combination of declining labor force and falling unemployment been occurring in Rhode Island lately? A picture is worth a thousand words. The chart below (click to enlarge) shows these two elements in Rhode Island for the last twelve months.
Do you see a pattern here? Actually, how can you miss it? For the entire time that Rhode Island's unemployment rate has been declining (all of 2011), our state' labor force participation rate has been declining as well. Note: the labor force participation rate (the red line in the chart above) is the percentage of our state's working age population that is in the labor force. Based on the chart above, there is definite evidence consistent with recent declines in our state's unemployment rate being at least partially related to Rhode Island residents dropping out of the labor force (as they stop actively seeking employment). And there can be strange results from the monthly Household Survey (see previous blog post on this). But this doesn't tell the entire story.
Third, there are actually two labor market surveys. The unemployment rate is obtained from the Household Survey. I won't tell you how small the sample size is for Rhode Island. This survey looks at Rhode Island's working age population and does not restrict employment to being exclusively within Rhode Island. So, Rhode Island residents working in other states are included in this survey, as are self-employed individuals. The other labor market survey, the Establishment Survey (and approximations to this by the Current Employment Survey in the short-term), focus exclusively on jobs within Rhode Island. Self-employed individuals, however, are excluded from this survey. So, given these differences, it is not uncommon for the two surveys to give different results, sometimes very different results. In recent months, survey results were noticeably different at times. Fortunately, though, the results for June were more in line with each other. Looking at recent results for this employment survey, job gains since January of this year (compared to a year ago), rose from 4,100 to a high of 9,400 in May, before declining to 8,800 in June. Throughout that time period, job loss fluctuated between 4,100 and 5,100. So, the net change in payroll employment here (what the local media inevitably reports as "new jobs" has actually been in an uptrend since January of this year. For the most recent three months, the net change in employment has been greater than 4,000. Thus, part of the reason for our state's declining unemployment rate over this period has in fact been for the "right" reason - improving employment (also see previous blog post dealing with this).
Finally, the unemployment rate is what economists refer to as a lagging indicator. In other words, its behavior this month to a large extent reflects events and trends that occurred in past months. Embodied within the way the unemployment rate is calculated is the likelihood that when an economy begins to improve, some discouraged workers will begin to actively seek employment once again. When that happens, they are once again counted as being part of the labor force and unemployed. This will often result is an increase in the unemployment rate, not a decrease, as one would normally assume when economic conditions improve. Rhode Island's declining participation rate itself is a net change of persons leaving (discouraged workers) and persons re-entering the labor force once they re-commence active job search.
So, has Rhode Island's economic performance, as summarized by the recent performance of its jobless rate been improving? Yes and no. Unequivocally! To summarize: Rhode Island's unemployment rate has been improving of late, yet it remains among the highest in the US; improvements in our state's jobless rate are not entirely the result of a better employment climate, but at least partially the result of our unemployed dropping out of the labor force.
MY REQUEST TO THE LOCAL MEDIA (an economist's pathetic plea!):
Please stop focusing so much on our state's unemployment rate, it is not a very accurate basis for portraying our state's overall economic performance. You need a much broader basis to do this accurately, such as my Current Conditions Index.
If, however, you opt to continue using the unemployment rate as your primary basis for assessing economic activity here, when you drive home after writing your story, only look in your rear view mirror for guidance the entire time (a practical example of relying on a lagging indicator). Let's see whether or not you make it home in one piece!
First, it is critical that this statistic be viewed in relative, not absolute, terms. While Rhode Island's unemployment rate has fallen from 11.5 percent, its level from August through December of 2010, to 10.8 percent in June of 2011, it remains the third highest in the entire US! So, Rhode Island continues to be known for its beautiful beaches and its very high unemployment rate. Quite a niche, isn't it? Let me also state for the record that I don't believe that our state's jobless rate was constant over that long of a period. The single value for the entire August to December of 2010 period is doubtless the result of a smoothing procedure utilized by the US Department of Labor.
Second, we must not forget to consider the way the unemployment rate itself is calculated. To be counted as unemployed, and therefore part of the monthly statistic, an unemployed person must be unemployed (obviously), physically able to work, and this is the kicker, actively seeking employment. What that last condition indicates is that it is quite possible for the unemployment rate the fall not as the result of higher employment, as most people think has to be the case, but because unemployed persons opt to cease their active job search. In economics, this is known as the "discouraged worker effect." Actually, that's a pretty dumb name, since these people obviously aren't working and they're well beyond being discouraged. So, if an unemployed person stops actively seeking employment, that person is no longer counted as being part of the labor force, and is therefore not counted as being among the "officially" unemployed. In light of all of this, you should always view the unemployment rate and labor force participation together. Has this odd combination of declining labor force and falling unemployment been occurring in Rhode Island lately? A picture is worth a thousand words. The chart below (click to enlarge) shows these two elements in Rhode Island for the last twelve months.
Third, there are actually two labor market surveys. The unemployment rate is obtained from the Household Survey. I won't tell you how small the sample size is for Rhode Island. This survey looks at Rhode Island's working age population and does not restrict employment to being exclusively within Rhode Island. So, Rhode Island residents working in other states are included in this survey, as are self-employed individuals. The other labor market survey, the Establishment Survey (and approximations to this by the Current Employment Survey in the short-term), focus exclusively on jobs within Rhode Island. Self-employed individuals, however, are excluded from this survey. So, given these differences, it is not uncommon for the two surveys to give different results, sometimes very different results. In recent months, survey results were noticeably different at times. Fortunately, though, the results for June were more in line with each other. Looking at recent results for this employment survey, job gains since January of this year (compared to a year ago), rose from 4,100 to a high of 9,400 in May, before declining to 8,800 in June. Throughout that time period, job loss fluctuated between 4,100 and 5,100. So, the net change in payroll employment here (what the local media inevitably reports as "new jobs" has actually been in an uptrend since January of this year. For the most recent three months, the net change in employment has been greater than 4,000. Thus, part of the reason for our state's declining unemployment rate over this period has in fact been for the "right" reason - improving employment (also see previous blog post dealing with this).
Finally, the unemployment rate is what economists refer to as a lagging indicator. In other words, its behavior this month to a large extent reflects events and trends that occurred in past months. Embodied within the way the unemployment rate is calculated is the likelihood that when an economy begins to improve, some discouraged workers will begin to actively seek employment once again. When that happens, they are once again counted as being part of the labor force and unemployed. This will often result is an increase in the unemployment rate, not a decrease, as one would normally assume when economic conditions improve. Rhode Island's declining participation rate itself is a net change of persons leaving (discouraged workers) and persons re-entering the labor force once they re-commence active job search.
So, has Rhode Island's economic performance, as summarized by the recent performance of its jobless rate been improving? Yes and no. Unequivocally! To summarize: Rhode Island's unemployment rate has been improving of late, yet it remains among the highest in the US; improvements in our state's jobless rate are not entirely the result of a better employment climate, but at least partially the result of our unemployed dropping out of the labor force.
MY REQUEST TO THE LOCAL MEDIA (an economist's pathetic plea!):
Please stop focusing so much on our state's unemployment rate, it is not a very accurate basis for portraying our state's overall economic performance. You need a much broader basis to do this accurately, such as my Current Conditions Index.
If, however, you opt to continue using the unemployment rate as your primary basis for assessing economic activity here, when you drive home after writing your story, only look in your rear view mirror for guidance the entire time (a practical example of relying on a lagging indicator). Let's see whether or not you make it home in one piece!
Wednesday, July 20, 2011
A New License Plate for Rhode Island
For quite some time now, I have been thinking of a way for Rhode Island to make some money while better synchronizing its name and designation as the Ocean State with its economic realities and the way things are done here. After great deliberation, I came up with my idea: a new license plate for Rhode Island. Like anything that can generate revenue in this state, a few changes will have to be made -- in this case changing our state's name from Rhode Island and Providence Plantations to something much shorter that reflects our fundamental approach to the statewide fiscal "status quo." Then, using this as "cause," I suggest changing our designation from the Ocean State to something that is the "effect" of the way we do things here. Here's what I came up with (click to enlarge this):
Note that I was able to preserve the wave on the license plate, but I changed its color to red reflecting how Rhode Island is drowning in the debt it has amassed over decades of questionable management.
Note that I was able to preserve the wave on the license plate, but I changed its color to red reflecting how Rhode Island is drowning in the debt it has amassed over decades of questionable management.
Tuesday, July 12, 2011
Media Coverage of the May 2011 Current Conditions Index
The May 2011 Current Conditions Index (the full report is given on my website) received a fair amount of coverage in the local media. Here is my regular monthly discussion of the index on Channel 10's Business Talk with Frank Coletta. The Providence Business News, as always, gave very nice coverage, as did GoLocalProv.
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