Separating Fact from Fiction in Rhode Island's Labor Market Data

This is an article I wrote several weeks ago that the ProJo chose not to publish in its printed edition.
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I've always admired weather forecasters. Whenever they want to know precisely what the current conditions are, all they have to do is look out the window. Things aren't quite that simple for economists. A great deal of the data we use is survey based. And, predictably, survey data are often revised, occasionally in ways that tell a very different story than what the originally released data showed.

This is the case Rhode Island right now. After my March Current Conditions Index report release, which showed that based on the existing data Rhode Island was flirting with the double-dip recession, I was informed by the Rhode Island Department of Labor and Training (DLT) that the likely upcoming revisions to their data will tell a strikingly different story. Instead of seven or eight months of consecutively declining employment, the upcoming data revisions apparently show that employment actually rose throughout that time period. What they did not say, but that is every bit as important, is that if employment has actually been rising, a number of other key indicators will also be affected, not the least of which is our state's unemployment rate.

Some of this was apparently discussed at the recent Revenue Estimating Conference and reported by the local media. However, with the release of the April labor market data, we only heard about the existing labor market data, which we now know is faulty. Whenever anyone turned on their television or read the local newspapers, they were told that Rhode Island's unemployment rate rose to 11.2 percent as employment fell yet again.

What an extraordinary time! I honestly can't remember ever being informed this close to the most recent rebenchmarking (data revisions) that such dramatic changes were coming. This placed the local media in quite a predicament, as they chose to report the April data as released by the DLT even though, as I pointed out to a number of them, we shouldn't put very much confidence in that data or the obvious conclusions that emerge from analyzing it.

So, at this point it is appropriate to quote the character Emily Litella of Saturday Night Live fame concerning Rhode Island’s large number of employment declines and the increase in our unemployment rate above 11 percent: Never Mind!

The origin of the situation we now find ourselves in is the result of cost cutting at the US Bureau of Labor Statistics (BLS). Soon, it will be taking over the task of producing the monthly employment numbers that was historically done by our DLT (this is also true for all other states). While this may well lower costs, its greatest cost to the people of Rhode Island will be the loss of all the experience and expertise of our DLT possesses. Furthermore, the way the BLS will produce their estimated labor market values will not incorporate as much known data as the DLT has in the past. Instead of beginning projections after the third quarter of the prior year, the BLS will start after the second quarter. Furthermore, and more troubling, Rhode Island will apparently be homogenized. By this I mean that exceptional circumstances or events that would routinely be analyzed and meaningfully incorporated into the labor market data by our DLT will now often be ignored by the BLS. As Rhode Island has an extremely idiosyncratic economy, this homogenization will make our state’s labor market performance appear to be very different from what it actually is at times. Ironically, the most obvious impact of this homogenization will be to make Rhode Island appear to more closely resemble overall US economy. If you don’t believe that, take one look at what the BLS has done with their estimation of our state’s manufacturing wage (especially look at the charts after Read More ...)!

Because of these extraordinary circumstances, I found it necessary to build a small econometric model of Rhode Island’s labor market in order to estimate and simulate various labor market indicators. According to my model, payroll employment has not been consecutively declining, as the existing data show, but is in a mild uptrend. At the Revenue Estimating Conference, the DLT offered tentative projections of where they believed payroll employment might be as of March. My model produces slightly more optimistic numbers. As of April, my estimate of payroll employment is slightly above 462,000, which is higher than the official April value of around 458,000. Instead of having eight consecutive employment declines in the last nine months, as indicated by the current DLT data, my model shows consecutive increases for seven of the past eight months, although not necessarily by large amounts. Along with this, my estimate of the April unemployment rate shows it declining to 10.7 percent, not rising to 11.2 percent. Even though my estimated jobless rate may appear to be “better” than the DLT’s official value, its foundations are less than flattering -- it is accompanied by declines in both our labor force and resident employment.

The current divergences in labor market data are not the fault of our state’s DLT, but the result of something forced upon them by the federal government -- a different methodology. While I continue to have the utmost faith in our state’s DLT, I am very irritated by the apparent attempt to politicize our state’s jobless numbers by the DLT’s spokesperson, Laura Hart. She recently offered an utterly ridiculous explanation as to why our state’s jobless rate is so high -- Rhode Island doesn’t have the economies of scale that states like Massachusetts have. If her hypothesis were correct, Delaware, another small state, would have a very high jobless rate, while California, an extremely large state, would have a very low jobless rate. For April, Delaware had a 6.8 percent jobless rate while that for California was 10.9 percent.

It’s bad enough that the diverging data exists. Having DLT’s spokesperson offer such ad hoc rationalizations only makes things worse.

Current Conditions Index Report: April 2012

This is an abbreviated version of my Current Conditions Index report for April (it excludes tables and The Bottom Line). I you want to read the full version, please go to my web site: http://www.llardaro.com .

Analyzing and forecasting an economy has always been part science and part art. In light of the situation Rhode Island currently finds itself in, based on the likelihood that the “official” labor market data for this state is inaccurate, I guess you can add navigating through fact versus fiction to the above list. 

Since existing labor market data are very likely understating two CCI indicators, Private Service Producing Employment and Employment Service Jobs, and overstating one other, the Unemployment Rate, I will now be providing two CCI estimates each month as the likely range for the CCI. This will continue until the flawed data disappears, hopefully next February.

So, in spite of what you continue to hear in this state, payroll employment has not fallen for eight consecutive months. Nor is Rhode Island close to a double-dip recession. Interestingly, though, with that many alleged consecutive drops in employment, why haven’t those analysts who believe the currently released labor market data actually made the recession call? I had avoided doing that prior to the revelation of the flawed labor market data, since the Current Conditions Index failed then, as it continues now, to show the requisite signal for a recession: six or more consecutive values in the contraction range of below 50.

With all of this in mind, Rhode Island entered the second quarter of 2012 on a positive note, as its re-acceleration from the mid-2011 doldrums continued. In spite of the fact that Current Conditions Index values based on the faulty existing labor market data (upper values) continue to show readings barely above stall speed, allowing for likely data revisions, the CCI has moved into the range of 67—75 throughout this entire year. This should not be construed as indicating that this recent acceleration is particularly rapid. Rhode Island continues to find itself in a sluggish recovery. It is the persistence of these higher CCI values that matters the most for now. We have moved above stall speed. As of April, Rhode Island’s recovery reached its 26th month.

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 — something for us to keep an eye on. Retail Sales increased by 1.6 percent, its eighth consecutive improvement compared to year-earlier values. Part of this is no doubt related to the skilled Rhode Islanders we rent out to neighboring states who bring their income home with them from states whose jobless rates we can only fantasize about here. Clearly, though, Retail Sales momentum is continuing. Along with this, US Consumer Sentiment rose as well, by 9.2 percent. For both of these indicators, April values exceeded their March levels. New home construction, based on Single-Unit Permits, continued its roller coaster ride, rising by 7.5 percent in April relative to last year. It too rose relative to March. New Claims for Unemployment Insurance, a leading labor market indicator that reflects layoffs, declined by 8.8 percent, its fifth improvement in the last six months. Finally, Benefit Exhaustions, reflective of longer-term unemployment, failed to improve for the first time in almost a year.

A Crash Course in Making Sense of the Stock Market: Part 1

Today, the May labor market data for the US were released. The stock market tanked, continuing a strong downtrend that has persisted for a few weeks now. How can you make sense of what is happening now or what might occur in the future? First, let me recommend a very well written and readable book about following the stock market: Fire Your Stock Analyst (2nd ed.) by Harry Domash. I also have a link on my web page with numerous references about the the stock market: http://www.llardaro.com/references_for_exploring_stocks.htm .

To start with, let me outline an important principle about the stock market's performance:

Principle #1: Over the long term, the primary determinant of stock price movements is the expectation of future profits.

Of course, in the short-term, emotion and a host of other factors may dominate stock price movements. I don't recommend that you attempt to anticipate very short-term movements.

You are no doubt already aware of the fact that in a global economy, the performance of US corporations is not immune to events overseas, since many US corporations receive a substantial portion of their revenues and profits from overseas operations. Thus, the macro performances of Europe and Asia have a major bearing on what will likely happen to future US corporate profits. We know that Europe is now in a recession and Asian growth has slowed. Add to this a very disappointing US employment report for May, and there have been lots of negatives already factored into profit expectations, which have been much of the driving force behind the recent stock market declines.

The real question, though, is what will happen to growth and profit from here? This brings me to a second principle:

Principle #2: Because the expectation of future profits tends to be the driving force underlying stock market prices, stock price changes tend to occur before (lead) changes that will ultimately occur in the overall economy. Based on this, the stock market is called a leading economic indicator.

The recent decline in the stock market therefore indicates the expectation that the rate of growth of the US economy will slow further in the coming months. One should be careful not to make too much of this, however, since, as the old saying goes, "The stock market has predicted eleven of the last six recessions." Indeed, the stock market tends to do a better job of predicting upticks in economic activity than downturns. So, I do NOT recommend that you use the stock market's behavior as the basis for predicting if a recession is coming.

Since we now live in a truly global economy, to truly understand what is happening in the stock market, or what may occur in the future, it is necessary to look beyond stocks.

Principle #3: Different types of markets are linked (interrelated), so that clues for future changes in the stock market can often be gleaned by observing what is happening in those other markets. This is called intermarket analysis. You should follow at least the stock market, the bond market (for interest rates), and commodity prices. Currency markets also matter as well.

The stock, bond, and currency markets are all leading economic indicators. Commodity prices, however, tend to lag. I will focus on the bond market here.

Interest rates are determined in the bond market. Bonds, if you are not up on these, are debt obligations. The entity issuing the bond  (ex: government, corporation, etc.) wishes to borrow money for some purpose. So they issue bonds, which in exchange for the money they receive from the bond investor, pay a fixed amount of nominal income over their term. There is a bond value, let's say $1,000, a stated interest rate, say 3%, and a term until the bond matures, lets assume 10 years. So, for when this bond is newly issued, you pay the $1,000. In return you receive a fixed income stream of $30 per year (the stated interest rate times the bond value = .03x$1,000) every year until the bond matures, then you receive the $1,000 back when the bond matures. Because bonds pay fixed amounts of income, these are called fixed income assets. Furthermore, the income is a nominal value. So, the greatest threat to bond holders is inflation, which lowers the real, or inflation-adjusted value, of the bond's fixed income.

Principle #4: Anything that raises actual or expected inflation makes bonds less attractive, since their fixed income then has a lower real (i.e., inflation adjusted) value.

As bonds are often sold before they mature (in secondary markets), higher expected inflation leads to some combination of lower bond demand (fewer buyers), and greater supply as some bondholders wish to unload their existing bonds. Both cause bond prices to fall in what is called a bond market sell-off.

The interesting thing concerns what causes expected inflation to rise. Generally, this is the expectation of more rapid economic growth.

Principle #5: Good economic news, which signals the likelihood of more rapid future growth, leads to higher expected inflation, which results in a bond market sell-off and lower bond prices.

Principle #51/2: Bad economic news, like the discouraging employment report today, signals the likelihood of slower future growth, which lowers expected future inflation, causing a bond market rally and higher bond prices.

These principles take a while to get used to: bonds tend to do well with bad economic news and the prospects for a weak economy. For this reason, bonds are referred to as a recession hedge.

Principle #6: When bad economic news occurs and expected growth falls (like today), the stock market sells off (due to lower expected future profits) while the bond market rallies (based on the expectation of higher real income from holding bonds). Money thus moves from stocks to bonds. This is called a flight to safety.


The stock market weakness over the past several weeks has therefore been a flight to safety. You are no doubt aware that the stock market has been declining. And, I will guess, you probably think there is no way to make money when the stock market is declining. WRONG!!! The bond market has been rallying.

Below is a chart of stock prices (the Dow-Jones Industrial Average) and bond prices (the 10-year US Government Bond Price) which illustrates what a flight to safety has looked like (click to enlarge).

Let me conclude by noting a principle I use all the time: which market changed direction first? Both stocks and bonds are leading economic indicators, but bonds have a longer lead time. In the next installment, I will discuss how to use changes in interest rates to help predict future stock price changes.

Current Conditions Index Report: March 2012

This is an abbreviated report of the Current Conditions Index for March of 2012. If  you are interested in reading the entire report with tables and The Bottom Line, please go to my web page: http://www.llardaro.com .

In my report last month, I noted that based on the existing labor market data being released by the RI Department of Labor and Training, “ … it is no longer clear whether the Rhode Island is still in a recovery or whether it has moved into the earliest stages of a dreaded double-dip recession. Payroll employment has now declined for seven consecutive months on a year-over-year basis … For many, this alone would be a sufficient basis upon which to make the recession call.”

After my report was released, I was informed by the RI DLT that the current labor market data has been understating job change, and that employment has been rising for some time now. So, remember all the data they were and are still publishing and the conclusions anyone serious about analyzing our state’s economy would arrive at based on them? To quote Emily Litella of Saturday Night Live fame: “Never Mind.”

So, in an odd and circuitous way, my overall conclusion last month that Rhode Island has not entered nor is about to enter into a recession proved to be correct. And, in spite of what the data published by the DLT now say, our state’s March Unemployment Rate is not 11.1 percent, but somewhat lower, likely in the 10-11 percent range.

All of this requires that I adapt CCI values. Since existing labor market data are very likely understating two CCI indicators, Private Service Producing Employment and Employment Service Jobs, I will now be providing two CCI estimates each month until the data flaws disappear (hopefully) next February.  

Rhode Island ended the first quarter of 2012 on a positive note, as a re-acceleration from the mid-2011 doldrums materialized. While Current Conditions Index values based on the faulty existing labor market data continued to show readings barely above stall speed (the top values), allowing for likely data revisions, the CCI beat or tied its year-earlier values for every month in the first quarter (the lower values). As of March, Rhode Island’s current recovery reached its 25th month.

On a year-over-year basis, four of the five non-survey-based CCI indicators improved. All five showed improvement on a monthly basis. Retail Sales increased by 4.4 percent, its seventh consecutive improvement compared to year-earlier values. While part of this is no doubt related to the skilled Rhode Islanders we rent out to neighboring states who bring their income home with them, Retail Sales momentum clearly does have “legs” at present. Along with this, US Consumer Sentiment rose as well, by 13 percent. Both of these indicators had March values that exceeded their February levels. New home construction, based on Single-Unit Permits, continued its roller coaster ride, falling by 14 percent in March relative to last year. But it too managed to improve relative to February. New Claims for Unemployment Insurance, a leading labor market indicator that reflects layoffs, declined by 7.1 percent, its fourth improvement in the last five months. It too showed strength relative to February. Finally, Benefit Exhaustions, reflective of longer-term unemployment, also fell, at a double-digit rate.

It Depends 2

In the last post I demonstrated that significant differences often emerge when values are adjusted for inflation. Even though all of our transactions are in terms of current dollars, meaning inflation is not explicitly taken into account, what matters most is real, or inflation adjusted values. This distinction is critical. As we saw earlier with respect to retail sales, and I will now demonstrate with labor income, even though current dollar values might indicate that things are going fairly well, when inflation is taken into account, a very different story emerges.

At the recent Revenue Estimating Conference, there was a good deal of discussion of something I discussed a few posts ago, that the labor market data will be revised higher than what the currently-published values show. That was and continues to be welcome news. The discussion then moved to labor income, which economist refer to as wage and salary disbursements (WSD). Clearly, this indicator has been doing fairly well recently and Rhode Island it has certainly moved beyond the lows it experienced at the depths of "The Great Recession." Should we interpret this as indicating that we have returned to where our economy needs to be, or that we have made a very substantial recovery up to this point? I'll let you judge for yourself. The chart below (click to enlarge) shows current dollar wage and salary disbursements for the US, New England, Massachusetts, Connecticut, and Rhode Island. All of these are expressed as a percentage of their value in the first quarter of 2005 (that is the value of 100).

If you've been following this blog, the pattern shown in the above chart should not be unexpected: Rhode Island's peak occurred at a value well below that of the other entities in the chart. And while the level of its WSD has been growing since its most recent trough in Q1 of 2009, it remains significantly lower than everyone else in the chart. The interesting feature is that Rhode Island's peak occurred at the same time as that for everyone else, in Q1 of 2008. Also, note that at present, wage and salary disbursements exceed that 2008 peak for everyone in the chart.

Since the first quarter of 2009, Rhode Island's wage and salary disbursements have clearly been growing. At present, they are in a very well-defined uptrend. Based on this, should we then conclude that the recovery here is proceeding nicely?  To many people the answer is definitely yes. To make a meaningful judgment about this, however, it is necessary to delve deeper and to take inflation into account. In other words, it is necessary to examine the behavior of real wage and salary disbursements. The next chart (click to enlarge) shows this over the same time period.

In what should come as a surprise to almost nobody, when inflation is taken into account, things aren't quite as rosy. This is especially true for Rhode Island. And, let's be honest, Connecticut isn't doing that great either. For Rhode Island, while we have managed to move above our trough in Q1 of 2010, we have only been able to return as far as our most recent peak, in Q3 of 2010. Rhode Island is the only entity in the above chart that has failed to move above its value for that quarter.

Will Rhode Island move above that value? In order to see what is necessary for this to occur, I need to quickly review a  relationship concerning real values:

The percentage change in a real value (such as WSD)

equals (approximately)

the growth in its current-dollar value

minus

the rate of inflation

Note from this that nominal growth (meaning current dollar growth) does not guarantee real growth. For real growth to occur, one hurdle must be surpassed. That hurdle is the rate of inflation. Therefore, if real wage and salary disbursements here are to break their most recent peak, it will be necessary for them to grow at a rate faster than inflation, which is currently around 2.0 to 2.5%.

Were the currently-released labor market data accurate, this might be fairly unlikely. Happily, the better-performing revised data make this highly likely. But even though our state's labor market is performing better than we had been led to believe, it's still not growing at rates resembling that in the rest of New England, the US, or southern New England, at least on a consistent basis. So, it's safe to say that while Rhode Island will break its recent peak in real WSD, it will  continue to lag the levels attained by all of those entities.

It Depends

One of the current success stories of late for Rhode Island has to be retail sales. Not only has retail sales been in a well-defined uptrend since the last quarter of 2009, at the present time it is very close to its highest level since 1990.

Retail sales can be either a coincident or lagging indicator, meaning that it either reflects what is going on at the present time or what has recently occurred. For Rhode Island, the most timely data on retail sales is that for retail sales subject to the sales tax. Based on when these taxes are paid and recorded here versus when the sales actually took place, retail sales for Rhode Island is a lagging indicator. Also, retail sales is a very cyclically sensitive indicator, which means the value of retail sales is very sensitive to the overall level of economic activity. The technical term for this is that retail sales are pro-cyclical, since they move in the same direction as the economy.

Like any economic indicator, it too has its limitations: since this is based on retail sales tax collections in Rhode Island, it excludes any items that are not currently subject to taxation, most notably clothing. And there can be distortions. For example, given the very mild winter, winter clothing expenditure very likely fell since the same time last year. If that decline was sufficient to move total retail sales lower than they were last year, the understatement from excluding clothing sales from our sales tax data might not be as large as it typically is. Similarly, since the meals tax in Rhode Island has been 14.7% higher than the regular sales tax rate for several years now, this has distorted "retail sales" for meals over this period -- tending to overstate the overall total. While this may sound like minutia, it is important to understand that every economic indicator has its share of "baggage." I have believed for quite some time now that the indicator any person likes best is probably the one that person knows the least about.

Let's take a look at the historical performance of retail sales in Rhode Island, using as our basis quarterly data on retail sales subject to the sales tax expressed at an annual rate. The chart below (click to enlarge) shows values since the first quarter of 1990. Please note that the vertical axis is stated in logarithms, mainly because a given vertical distance represents the same percentage (relative) change between any two period in the chart.

The most recent peak in retail sales occurred in the fourth quarter of 2006, at $12.7 billion. Can you think of anything else that happened that quarter (hint: we have discussed this numerous times in prior posts)? The answer: it coincides with Rhode Island's most recent employment peak. This reflects the fact that retail sales are very sensitive to the overall level of economic activity, as stated earlier. The trough for retail sales was in the fourth quarter of 2009, at $11.2 billion. Thus, Rhode Island's peak-to-trough decline in retail sales was 11.8 percent. Note that retail sales have trended upward throughout this recovery, although not straight up. Once again, the cyclical nature of retail sales is in evidence here.

This chart provides an excellent illustration of the mindset of most, if not all, of Rhode Island's leaders, its media, and its residents: things here have now turned around nicely, and Rhode Island is doing much better it has in a very long time. Add to this the fact that income tax revenue is up, at least above expectations, and if you read my last post, employment is apparently higher and our state's jobless rate is lower than the currently published data indicate. Thus everything appears to have returned to normal.

I agree totally with the assessment that everything here has returned to normal -- but Rhode Island's "new normal." In economics, we never look at things in absolutes. Instead, we always evaluate things in relative terms. This precludes our making substantive judgments about the behavior of indicators that are stated in current dollars, as retail sales is above. So, let's now turn to evaluating retail sales here in relative terms -- meaning relative to the purchasing power of the present time. This, recall, means examining the historical behavior of real retail sales.

The next chart shows the behavior of real retail sales subject to the sales tax for Rhode Island since 1990 (click to enlarge). As should become readily apparent almost immediately, this gives a very different picture of our current situation.

When taking inflation and purchasing power into account, the peak in real retail sales occurred in the third quarter of 2004, at $14.8 billion. This peak thus came well before the current dollar peak (in 2006Q4). Note that by stating retail sales in the purchasing power of Q1 in 2012, we are "inflating" current dollar values from earlier periods into what they would be if dollars then had the same purchasing power as today, which explains why earlier current dollar values are higher when stated in real terms. The trough in real retail sales occurred in the fourth quarter of 2009, at $11.9 billion. This is the same quarter as the trough in current dollar retail sales.

The reality of Rhode Island's current situation, our "new normal," to quote the phrase coined by Mohammed El-Erian of PIMCO, is in fact very different from the predominant view of our state's economic performance. First, real retail sales here have been falling since the third quarter of 2004, well before our most recent employment peak. Second, the peak-to-trough decline in real retail sales here was much greater than one would conclude based on current dollar values, just under 20 percent. Third, while real retail sales have improved since their trough in 2009Q4, they have registered almost no gain since that time: $12.1 billion versus $11.9 billion. Finally, the most recent trend in real retail sales is sideways to downward. Thus, Rhode Island's economy has failed to perform well enough to consistently generate retail sales growth rates in excess of inflation for quite some time now.

Where does all of this leave us? Not where almost everyone in this state appears to believe. Retail sales data, when viewed in the correct context of real values, confirms something I have written about in more posts than I care to think about, that Rhode Island is in a very tepid recovery. So, even when (or if) current dollar retail sales here exceeds it recent high of $12.1 billion, we will not have returned to anywhere even remotely close to where we once were. So, do we continue to contrast the current situation with the depths of where we once were, as seems to be the dominant view, or should we shift our focus to where we are relative to recent heights? You can guess which I will continue to opt for.

We should be attempting to move toward recent highs -- that should be the standard of excellence or satisfactory performance here. And, guess what? That outcome doesn't just fall on us from heaven. We have to work for it. And very often, this will require that we work very hard to get there. I heard a great saying a few months ago that pertains to this: "Success is not a destination, it is a journey." It's time for Rhode Island to purchase its ticket for this journey, because the dominant perspective here, to dust off an old phrase I used to use to describe Rhode Island about a decade ago, defines success in terms of "Relative Mediocrity."

A Different Way to Calculate RI Employment: The Dawn of a New Era?

As we recently discovered, the revised data on Rhode Island's payroll employment are going to be significantly different than the currently published numbers. First, these will now be calculated by the US Bureau of Labor Statistics (BLS). The BLS will not incorporate Rhode Island's idiosyncrasies, as manifested in its idiosyncratic data, in the same way as the Rhode Island Department of Labor and Training (DLT) has in the past. Second, as the basis for making ongoing monthly estimates of Rhode Island's payroll employment with the Current Employment Survey (CES), BLS projections will start with an earlier time period than has historically been used by Rhode Island's DLT. As a general forecasting rule, the farther from known data one projects, the greater the variability of the estimates will likely be. Taken together, these changes can be viewed as constituting a different methodology. Most importantly, expect this new methodology, which officially begins with the February 2013 data report, to produce differences with respect to both the reported values of payroll employment each month, and even more importantly, their volatility through time.

Today's ProJo story by Kate Bramson quoted an economist from the BLS New England office in Boston, Timothy Consedine, as stating the reasons for these changes: " ... to improve cost efficiency and 'to reduce the potential for statistical bias in state and area estimates.' "

It's certainly hard to argue with either of these noble intentions. Now let's put these assertions to a test. Since March of 2011, the manufacturing wage data for Rhode Island has been calculated by the BLS. Assuming that Mr. Consedine's assertions are correct, manufacturing wage data here should have improved at least by a bit, if not by a great amount, since the BLS took over their estimation. There has indeed been an extremely visible difference since that time. I won't tell you what it is. Instead, I will provide two charts of Rhode Island's manufacturing wage behavior and let you see if you can figure out what this change has been. In both charts, RI and US wages are contrasted. The first chart (click to enlarge) shows US and RI manufacturing wage growth since January of 2008.

Click on Read more to see the charts.

Current Conditions Index Report: February 2012

Below is an abbreviated version of the February Current Conditions Index report. The full report (with indicator table) is available on my web site: http://www.llardaro.com/ . The value of the CCI, 50, its neutral value. Based on currently released data, Rhode Island is at a near standstill.

Apparently, however, data revisions that will occur with the next round of rebenchmarking (to be released next February), paint an entirely different picture of the behavior of employment. In other words, the currently released employment data is far off the mark: while the currently published data show seven consecutive employment declines (year-over-year), according to the revised data, no declines might have actually occurred. Let me be clear about this: this is in no way the fault of the RI Department of Labor and Training (DLT). Instead, it is the direct outcome of the different methodology utilized by the US Bureau of Labor Statistics (BLS) for obtaining employment values that will be replacing the methodology historically used by the Rhode Island DLT with the next data rebenchmarking.

So, assuming that actual employment is apparently moving in the opposite direction of the values currently being published, the most likely changes to the February CCI would pertain to both Employment Service Jobs and Private Service-Producing Employment. Even though each of these declined according to the existing data, it is highly likely that both will have increased according to the newly revised ("shadow") data. If that is what ultimately ends up occurring, the February CCI value will increase to 67, a very different value than the 50 based on the data the DLT is publishing at present.

I'm sorry for the confusion, but up to now, I have always been able to rely on the data published by the DLT. I still have full confidence in the RI DLT. However, it will now be necessary to begin relying far more heavily on the US BLS. Effectively, Rhode Island will be "homogenized" based on their national models. So for now, until the newly rebenchmarked data are released in February, it will be necessary for me to publish a range of likely CCI values -- until the BLS "shadow" employment numbers coincide with those being released by the DLT.

The Unexpectedly Strong Performance of Rhode Island's Manufacturing Sector

Rhode Island's manufacturing sector, like that of the nation, has continued to perform extremely well since 2009. Ironically, 2012 marks the 25th anniversary of Rhode Island being a post-manufacturing economy (here is the basis for this). Since late 1987, when this structural transformation occurred, the sectors that have led in the early stages of recoveries have conspicuously excluded our state's goods producing sector -- manufacturing and construction. So, while construction continues to remain extremely weak and depressed here, adding a further downdraft to our state's already weak economic momentum, manufacturing has provided a welcome boost throughout this entire recovery.

There are a number of reasons why US manufacturing (and related to this -- exports) has done so well. First and foremost is the US Dollar exchange rate. The dollar depreciation that has occurred over the past few years, driven largely by the extremely low interest rates orchestrated by the Federal Reserve, has made exports from the US much more competitive to foreign buyers than they otherwise would be. In addition to this, appreciation of the Japanese Yen has caused production costs there to become unacceptably high to a number of manufacturers, leading them to shift their Japanese production to other countries. To some extent, US manufacturing has benefited from this. Then there is the success of China as an exporter, which has produced upward pressure on manufacturing wages there and upward pressure on their currency, the Chinese Yuan. Finally, political pressure that continues to be applied to US manufacturers has led them to move some of their operations back to the US. The extent to which these factors have benefited Rhode Island manufacturing is not clear at this time. Since a study of this topic would entail due diligence, it is safe to conclude that no such study will ever occur here.

For Rhode Island, much of the recent manufacturing strength has been manifested in a return of the workweek from the highly depressed values it fell to during "The Great Recession" to more typical values. During the past three months, the workweek here has moved beyond the 40-hour level. In February of 2012, the average workweek, 40.7 hours, was the fifth highest length since 2000 (using the new industrial classification system that is as far back as we can go). The chart below (click to enlarge) shows Rhode Island's manufacturing workweek since 2000.

The first thing that stands out in this chart is the well-defined uptrend in the workweek since the trough in July of 2009 (before RI's current recovery began). Second, for the last three months (December of 2011 - February of 2012), the workweek has exceeded 40 hours, something Rhode Island hasn't seen since 2000. Finally, at its present level, the manufacturing workweek in Rhode Island is not very far from its "record" level over this period of 41.2 hours. 

So, along with the very favorable workweek behavior comes a potential caveat for the coming months: sustaining or even increasing the workweek in the future will not be an easy task. If the workweek begins to return to more "typical" levels, between 39 and 40 hours, which elements of our state's economy will take the "baton" and help to sustain Rhode Island's forward economic momentum from that time forward? The answer to that question is not at all obvious at the present time. In fact, even with all of this recent welcome manufacturing momentum, the negative forces at work here may well have gained the upper hand, to such an extent that Rhode Island's recovery might actually be over at the present time (see prior post that discusses this).

Let me conclude by noting that the substantially higher workweek we have been witnessing here represents firms substituting hours for the hiring of additional workers. As the inadequacy of the skills of Rhode Island's labor force is not debatable at this point, and as far as I can tell, nobody has ever accused Rhode Island's business climate of being competitive, the cost to firms associated with increasing employment, both in terms of skills and other costs, may well remain unacceptably high for our manufacturing firms for some time to come. This will remain central to defining our state's "limits to growth."

Recovery Rhode Island Style

Rhode Island never seems to do things like other states do. Sometimes that can be a good thing. But when it comes to economic performance, it has proven to be a nightmare: Our nightmare -- an extremely tepid recovery that might now be over.

In my first post on this Blog, I provided a series of charts comparing Rhode Island to the US, New England, Massachusetts, and Connecticut. I have (sadly) updated the most important of them, payroll employment, with the most recent data. The chart below shows this (caution: if you have just eaten, you should probably wait about an hour before viewing this chart. For those who haven't just eaten, click to enlarge):

I would hope that most people are aware of the following stylized facts that should be readily apparent from the chart:

1. Payroll employment in Rhode Island peaked in December of 2006, well before the peaks in the US, New England, Massachusetts, or Connecticut;
2. Rhode Island's payroll employment fell by a greater percentage than any of the other entities in the chart, by 8% from its peak;
3. At its best during this recovery Rhode Island's payroll employment moved back to just slightly above 93 percent of its prior peak;
4. All of the other entities in the chart have seen rising employment for some time now, moving ever closer to their prior peaks while Rhode Island has regressed -- its payroll employment is declining, falling back to just above 92 percent of its peak level.
5. If you want to see what is happening to the unemployment rate in all of these entities, flip this chart upside down. This explains why Rhode Island has such a stubbornly high jobless rate -- we're not creating jobs!

An observation: during recoveries, payroll employment is supposed to continually rise. But this is Rhode Island. We don't do things here the same as everywhere else. If you look at my prior few posts, payroll employment in Rhode Island has now declined on a year-over-year basis for the past seven months. That by itself might be a sufficient basis to believe Rhode Island's recovery has ended and we have entered into the early stages of a double-dip recession. At present, I am not quite ready to make that call, but I think it is safe to say that if we are still in a recovery, we're hanging on by our proverbial finger nails.