Current Conditions Index: April 2013

Below is an abbreviated version of the April 2013 Current Conditions Index report. The full report (in PDF format) along with tables and historical reports is available on my web site:   http://www.llardaro.com 

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The assessments of Rhode Island's economy provided by the Current Conditions Index over the past few years were recently confirmed by data released from the US Bureau of Economic Analysis (BEA). The CCI showed that Rhode Island's economy was virtually flat in 2011, with an average value of 55 for the entire year (approximately a neutral value), before accelerating in 2012, mainly during the second half of the year. According to the BEA data, real GDP for Rhode Island was unchanged in 2011, then accelerated to a 1.4% rate of growth in 2012. I had referred to this uptick as our “shifting into higher gear” and noted that for Rhode Island, shifting into a higher gear meant moving to third gear, unlike many other states which had already moved to even gears. Sadly, my assessment turned out to be a bit too accurate: the 1.4 percent rate of growth in 2012 for Rhode Island was its highest rate since 2006!

According to the CCI values for 2013, Rhode Island’s economy has slowed a bit from its accelerated pace in late 2012. During the first three months of this year, the CCI had moved between 67 and 83. Although two of the three values weren't particularly strong, all three did manage to beat their year-earlier values (part of the weaker portion of 2012). For April, the CCI slid once again to 67 as only eight of twelve indicators improved. And, for the first time this year, the CCI failed to better its year-earlier value.

Don’t interpret this as indicating that Rhode Island’s economy has substantially weakened, or that it is about to fall off of a cliff. Instead, the pace of economic activity here has leveled off to about what we attained by the end of 2012. That’s not great, but a lot better than virtually anything we have seen since 2006.

 

In spite of all of this, there was cause for optimism in April’s data. Two leading indicators turned in strong performances, while a few of our recent strong indicators had to overcome strong comps from a year ago. The continued uptrend in Single-Unit Permits, a leading indicator, reflects our having moved past a bottom in new home construction. In spite of recent volatility, permits appear to have settled into a range of about 60+ permits per month. Employment Service Jobs, also a leading indicator, reflects temporary employment, a prerequisite to overall employment growth. This indicator has consistently improved since last April. This April, it rose by a stunning 10.6 percent compared to a year ago. US Consumer Sentiment failed to improve (but barely) for only the second time in over a year, although its comp from a year ago was very difficult to beat.

Rhode Island’s manufacturing sector continued to show strength, as Total Manufacturing Hours rose again (by 1.7%) while our Manufacturing Wage continued to rise at what I believe to be a non-credible rate (4.2%). New Claims for Unemployment Insurance, which reflects layoffs, has begun to rise on a year-over year basis, a very unwelcome development. It has been trending higher on a monthly basis since the third quarter of last year. Private Service-Producing Employment, whose growth has fallen to below one percent of late, appears to be in the process of stabilizing around 350,000.  

While Rhode Island’s Unemployment Rate fell to 8.8 percent in April, this change is not as significant an indicator of Rhode Island’s momentum as many here seem to believe. Not only is the Unemployment Rate a lagging economic indicator, most of its recent monthly declines have coincided with declines in our Labor Force, reflecting the fact that a number of our state’s jobless residents are continuing to drop out of the Labor Force as they are no longer actively searching for employment (part is also related to retirements).

 

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See the full report (with tables) at: http://www.llardaro.com  .

Is the Recent Decline in RI's Labor Force an Anomaly?

Yesterday we received the April labor market data for Rhode Island. While many celebrated the fact that our state's jobless rate fell below 9%, I raised the question, as I have on numerous occasions over the years, about whether or not this is truly cause for celebration. Clearly, a lower jobless rate is preferred to a higher one. However, is important to assess not only the level of the unemployment rate but the reasons that underlie how (and why) it is changing.

My guess is that many people here believe that the April decline in our labor force that accompanied our jobless rate improvement really isn't very important, and that somehow this was a one time or rare event. Instead of my stating what I believe is the only reasonable conclusion here, I will let you judge for yourself. Below is a chart (click to enlarge) that shows Rhode Island's labor force and unemployment rate dating all the way back to 2009. Included in this chart is a vertical line denoting when the current recovery began (in February 2009).

I believe the graph illustrates rather conclusively that the combination of declines in both the unemployment rate and labor force is not the exception, but instead has been the rule over this entire period with few exceptions. Let me state that even prior to 2009, there were more instances that I can remember where we saw this combination of declines in both our unemployment rate and labor force.

In fact, when I designed my Current Conditions Index (CCI), I explicitly took this relationship into account, which I would not have done for any other state. Specifically, I included as two separate indicators the labor force and the unemployment rate. The significance of including them as a pair arises from months like April: an improving unemployment rate is a +1 for the monthly CCI value, while the decline in the labor force is a -1. The result is that these two changes cancel, leaving the  monthly CCI value unchanged. Therefore, a decline in Rhode Island's jobless rate by itself does not necessarily improve the Current Conditions Index value for a given month.

Let me conclude by noting a unique fact for Rhode Island. Rhode Island is the only state that has been consistently losing population since July of 2004. In general, a smaller population adversely impacts the size of a state's labor force. In the coming months, this will make it more difficult for Rhode Island to reverse the well-established downtrend in its labor force.

Current Conditions Index; February 2013

Below is an abbreviated version of the February 2013 Current Conditions Index report. The full report (in PDF format) along with tables and historical reports is available on my web site:   http://www.llardaro.com 

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Just as persons in Rhode Island finally discovered that our state’s economy performed considerably better than the flawed labor market data had led us to believe throughout 2012, we wake up to the reality that the first two months of 2013 have not been as kind to our state’s economy. During the second half of 2012, Rhode Island’s recovery clearly strengthened, as the breadth of overall economic activity here (the number of indicators improving) and the pace of this recovery accelerated. We attained Current Conditions Index values of 92 twice in late 2012 and finished the year with a pair of 83 values, as ten of the twelve CCI indicators improved. For January of 2013, the CCI fell to 75, and in February, the third anniversary of Rhode Island’s recovery, the CCI fell to 67, as only eight CCI indicators improved. Happy Anniversary! At least it is still possible to say that while the CCI values for each of the first two months this year were somewhat discouraging relative to what we saw in the second half of 2012, both did manage to exceed year-earlier values. 

This isn’t the first time I can recall seeing less impressive performance than what we had apparently missed after upwardly revised data were released. What a tease!

I wish I could say that this month’s indicator performance was in some way misleading, that there is reason to believe that Rhode Island’s economy isn’t slowing, but the data show rather convincingly that Rhode Island’s economy has in fact slowed during the first two months of 2013. Perhaps even worse, two critical indicators that have been strong performers for some time now may be in the process of reversing their trends.

The first of these is Retail Sales. Its performance has been stellar, as its year-over-year growth rates have exceeded 3 percent, reaching over 6 percent several times since October. It is quite possible that the combination of the lapse of the Payroll Tax Holiday and high gasoline prices will produce retail weakness throughout the first half of 2013. The other indicator is New Claims for Unemployment Insurance. This is a leading indicator that reflects layoffs. On a year-over year basis it has improved for some time now. It has, however, begun to weaken on a monthly basis, which could eventually translate into weakness year-over-year. 

Along with both of these, several of the indicators that were supposedly declining but actually improved last year have begun to slow as well. Growth in our state's Labor Force has moderated since December, as has Employment Service Jobs, a leading labor market indicator. The same is true for Private Service-Producing Employment, which saw its growth fall below 1 percent for the first time since December. To be fair, there was a “strange” behavior for payroll employment in February, as it fell from January’s level, which is very likely responsible for the slowing rates of growth for both Employment Service Jobs and Private Service-Producing Employment. Let’s hope this doesn’t signal that the employment data is getting “strange” again this year! 

 

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See the full report (with tables) at: http://www.llardaro.com .

 

So, How's Rhode Island's Economy Doing?

New York City had a great mayor who recently passed away, Ed Koch. He became famous not only for his excellence as mayor, but for his saying: "So, how am I doing?" Now that Rhode Island's jobless rate has at long last fallen below double digits, this is a very good time to pose that question for Rhode Island's economy.  

It's particularly important to address this question for a number of reasons. Most importantly, in a well-run state, the leaders of that state continually assess both the strengths and weaknesses of their state's economy and work hard to make their economy more competitive. Clearly, they understand, to quote the old saying, that success is a journey, not a destination. But I digress. I want to talk about Rhode Island, which is hardly a well-run state and whose elected officials have yet to earn the designation "leaders."

One of the major factors that I believe has held Rhode Island back is the mindset and psychology of its elected officials. In Rhode Island, our elected officials seem to always do things the same way: they tend to restrict their focus exclusively to Rhode Island and its performance only at the present time. A number of years back, I attempted to develop a nomenclature for the psychology of Rhode Island's elected officials. In a 2008 article I wrote for The Providence Journal, I described this behavior, which characterizes that mindset all too accurately, as PAROPIC. What does this word mean? It is a combination of "parochial" and "myopic." Welcome to our world!

This focus by Rhode Island's elected officials has proven to be disastrous in terms of our ability to move our state's economy forward. Consider, for example, that in the past several months Rhode Island's unemployment rate finally fell below 10%. To our states leaders, this was an end in itself, since our "metrics" were moving in the right direction. Apparently, our elected officials interpreted this as indicating that everything was beginning to move in the right direction, and as far as I can tell, they viewed this as reflecting the beginning of "the turnaround" of Rhode Island's economy that will set all right here. For them, success is obviously a destination.

This was a textbook example of paropic behavior! Why? Because while Rhode Island's unemployment rate was declining, so too were the rates in almost every other state. Ironically, when these declines occurred, Rhode Island moved into a first-place tie for the highest unemployment rate in the United States (tied with California in January). The only way this reality ever made it into the consciousness of our state's elected officials was as the result of media stories that almost always take comparative national performance into account.

The real question here is why Rhode Island's rate jobless has remained among the highest in the country, even though it has been declining of late. Furthermore, it's important to keep in mind that the unemployment rate is a lagging economic indicator. We need to go behind the scenes for this number to understand what is really going on.

Fortunately, that's not very difficult to do. If you want to understand why Rhode Island's unemployment rate became so high and has remained elevated for so long, you need to go no farther than an examination of the recent behavior of payroll employment. But such analysis should not be paropic. An informed analysis will look at the temporal performance of Rhode Island's payroll employment relative to that of neighboring states, our region, and the entire US.

The chart below (click to enlarge) shows payroll employment for Rhode Island, Connecticut, Massachusetts, New England as a whole, and the US since 2005.

What should be apparent from the outset is that Rhode Island has clearly distinguished itself.  Not in terms of stellar performance, but by how it has underperformed all of the entities to which it is being compared over this period. What are the distinguishing features, or "stylized facts"  of Rhode Island's comparative payroll employment performance since 2005?

1. Rhode Island's economy experienced its employment peak before that of everyone else in the chart;
2. Payroll employment for Rhode Island fell noticeably farther in percentage terms than anyone else in this chart;
3. While Rhode Island's payroll has clearly risen since its trough in mid-2009, it has risen more slowly than anyone else in this chart;
4. From its employment trough, Rhode Island's payroll employment has only risen by 2.5 percent, far less than anyone else considered above; and
5. As of January 2013, Rhode Island's payroll employment remained about 6 percent below its peak (in December of 2006).

If you want to see our comparative unemployment rate performance, you could gather all of the required data and replicate the chart above. A far simpler way, however, is to simply print out the above chart, flip the page, then turn it upside down. If you do this, you will likely be amazed at how good of a job it does in allowing you to visualize Rhode Island's joblessness in a non-paropic manner -- in relative terms through time.

Current Conditions Index: January 2013

Below is an abbreviated version of the January 2013 Current Conditions Index report. The full report (in PDF format) along with tables and historical reports is available on my web site:   http://www.llardaro.com 

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The long-awaited revisions to Rhode Island’s labor market data have finally arrived. While I have been anticipating these for quite some time now, it appears that most people in the state remained unaware of what was actually happening until very recently. According to the previous “official” data, Rhode Island was doing very badly. At one point, it wasn't all that difficult to conclude that we had actually entered into a double-dip recession. Throughout all of this, I kept chugging along each month with reports indicating that contrary to the “official” data, our state’s economy was performing fairly well in terms of its overall momentum and the breadth of activity here.

 

The new data confirm my prior analysis. Not only has Rhode Island's economy been improving for some time now, the pace of activity here actually accelerated during the third and fourth quarters of 2012. A quick examination of the chart for the Current Conditions Index (below, right) shows this very clearly. The good news for me is that I can now stop providing two CCI numbers each month. As of January, Rhode Island’s recovery was 35 months old.

 

According to CCI revisions for 2012, values revised higher for ten of the months, one was unchanged, and December was revised down slightly. What a difference! For all of 2012, the CCI registered values of 83 or greater five times, with two of those equal to 92.

 

So, after strong third and fourth quarters in 2012, Rhode Island began 2013 on yet another positive note as the Current Conditions Index registered a value of 75, with nine of 12 indicators improving. Among the indicators that improved were several very strong, favorable trends. Not the least of these pertains to Retail Sales. Its year-over-year growth has matched or exceeded six percent for three of the past four months. Along with this, our state's Labor Force appears to have finally begun to rise again, starting in last August. That upward trend makes the improvements in our state's Unemployment Rate more significant. Two changes I had anticipated were confirmed. Private Service-Producing Employment has actually been rising for quite a while, as was true for Employment Service Jobs. Finally, the revised CCI values show that Rhode Island was not stuck in a saw tooth pattern through the middle of 2012. Instead, there was consistent momentum throughout all of last year with an acceleration during the second half of the year during which it is safe to conclude that Rhode Island’s economy shifted into a higher gear.

 

Three indicators failed to improve in January. Government Employment, which reflects the effects of ongoing fiscal consolidation, hasn’t improved since August of 2010. It might be in the process of bottoming, assuming that our recent momentum is sustained, as it has fluctuated around 60,000 for several months now. US Consumer Sentiment also failed to improve, but January’s decline was its first in almost a year. Recent stock market momentum bodes well for this indicator. Lastly, Single-Unit Permits fell in January, but its “comp” from a year ago was almost impossible to beat due to the weather last January. The apparent bottoming of housing here should help prevent this indicator from moving into a downtrend in the coming months.

 

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See the full report (with tables) at: http://www.llardaro.com .

 

Rhode Island's Revised Labor Market Data



For the better part of a year, I have been addressing the problems with Rhode Island's "official" labor market data. On several occasions in years past, we have had situations where a divergence between the direction of changes in actual and official data emerged. Historically, though, these never occurred until October. Within a couple of months, we would get the rebenchmarked data and we'd be back to the correct labor market trends.

 

In this most recent episode, we were treated to something I had never seen in over two decades of analyzing Rhode Island's economy: a divergence between actual and "official" data that started in the first half of the year. Before I became aware of this, I had detailed how horrible the official data were in a series of blog posts. If those data were to be believed, then Rhode Island would indeed have entered into a double-dip recession.

 

The picture painted by that data was so incredibly negative, I became suspicious that things could be that bad -- even for Rhode Island! The primary basis for my suspicions was the apparent strength in a number of key economic indicators such as retail sales. While it was possible to explain some of the apparent divergences between retail sales and labor market weakness based the fact that Rhode Island rents out substantial numbers of its skilled residents to our neighboring states, I continued to sense that something still wasn't right. Then, one day, I received an email from the Department of Labor and Training stating that when these data are revised, they will show that payroll employment has been actually been rising, not falling, for some time now, a total contradiction of the "official" data.

 

In light of this rather strange situation, I went back and dusted off my econometric models for Rhode Island's labor market and updated them using only non-survey based data. Using those models, I then ran simulations attempting to gauge for myself what was actually happening, in spite of what the "official" data continued to say. Using the results of those simulations, I began to provide two monthly numbers for my Current Conditions Index: one was based on the "official" flawed data; the other was consistent with my simulated values. From that time forward, I presented what I was able to ascertain about the actual conditions in Rhode Island through this Blog and my monthly CCI reports.

 

I think of this time as my "Maytag Repairman" period (if you recall those commercials), as I was all alone in this endeavor, since all that was known and reported by our state's media was the flawed "official" monthly data. That, of course, created a real problem here since the data everyone was basing decisions on substantially understated Rhode Island's actual economic performance. Ironically, that made me the most positive and upbeat person when it came to assessing Rhode Island's economic performance. Accuracy cuts both ways!!!

 

Last week, the revised data were at long last made public. What they showed was what I had anticipated and written about since around March 2012, that things here were actually better that we had been led to believe. Ironically, using the newly corrected data, the revised Current Conditions Index values were very close to the corrected values I had stated using my econometric simulations.  In this post, I want to present three charts that highlight what was going on throughout that entire time period.

 

The first of these charts contrasts the originally presented data with the revised data going back to 2010 (click to enlarge). As should be apparent from this chart, there is a very substantial difference in the two sets of data that began around August of 2011. Perhaps most importantly, Rhode Island never flirted with the double-dip recession. Very much to the contrary, employment has shown a fairly healthy increase over the past two years, healthy for Rhode Island at least.

The next chart (click to enlarge) shows the same data as the above chart but includes the actual trend for the correct data. I will leave it to you to figure out the trend for the inaccurate original data.

 

 

The final chart (click to enlarge) shows changes in payroll employment for each month over the past two years. These are year-over-year changes, which means each month compares its value to the value one year ago (ex: December of 2012 with December of 2011, etc.).

 

 

The most striking feature of this chart is how year-over-year changes became negative starting all the way back in October of 2011, which led to the conclusion by some that Rhode Island may well have entered into a double-dip recession. That is the faulty data I found it necessary to improve the accuracy of through my simulations, ultimately reporting them in my monthly CCI reports. By contrast, the revised data show that year-over-year changes were never negative over this entire period: employment each month continued to exceed its year-earlier value. 



 

Where does this leave us? Rhode Island is doing considerably better than we were led to believe based on the flawed "official" labor market data (based on the old benchmark). We have never flirted with a double-dip recession since the end of the last recession almost three years ago. But while Rhode Island's economy was improving, so too were the economies of almost every other state. So, six years from our prior payroll employment peak (December of 2006), Rhode Island employment remains about six percent below where it once was. Ironically, while our unemployment rate has declined, it is now below 10 percent, we continue to have either the highest or one of the highest jobless rates in the country.

  

How are these changes in payroll employment linked to our state's unemployment rate and its national ranking? What this post has shown is that Rhode Island's level of employment has continued to rise and never fall, as the original data showed. What matters in addition to this is how rapidly our employment is rising. Sadly, that's where Rhode Island comes up short. Rhode Island failed to reinvent itself and make itself more competitive throughout The Great Recession and afterwards.

 

Sadly, our elected officials appear to believe that because they have now decided that they actually want to do something about this, we should be able to quickly and easily remedy our state's deficiencies. Apparently they intend to go to Staples and purchase an "Easy" button. Sadly, things are never that easy. It will take a great deal of hard work and consistent effort guided by due diligence before things here begin to change in any significant way. Sadly, that's very different than their current standard operating procedure, D + M: Denial + Manana. If the day ever comes when our elected officials actually begin to lead, all of us will be happily surprised by how much our state's economy will be able to improve.

 

Current Conditions Index: December 2012

Below is an abbreviated version of the December Current Conditions Index report. The full report (in PDF format) along with tables and historical reports is available on my web site: http://www.llardaro.com .
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What an incredible way to end 2012! The Current Conditions Index for December rose all the way to 92 — its highest level since November of 2003. It is now abundantly clear that Rhode Island’s economic performance during the fourth quarter was its strongest in terms of overall momentum (not levels, though) for quite some time. The fourth quarter average for the CCI was 80.7 using the flawed labor market data, and 86 with my estimates of how the numbers will be changed with the release of the rebenchmarked data. More importantly, though, the labor market data apparently became less flawed as 2012 progressed, so for December, and hopefully future months, a single CCI value   accurately characterizes Rhode Island’s economic performance.

For December, eleven of the twelve CCI indicators improved. A number of these turned in relatively strong performances. The sole indicator that failed to improve was Government Employment, which reflects the effects of ongoing fiscal consolidation. While that indicator hasn’t improved since August of 2010, it might soon bottom if the momentum gains registered in the fourth quarter are sustained. At any rate, Rhode Island’s recovery was 34 months old as of December.

What all of this indicates is that during the fourth quarter, none of  the strong monthly performances we witnessed were “one month wonders.” What we saw unfolding was a trend of more broadly based economic activity that continued to increase our state’s economic momentum. It is now safe to conclude that as 2012 ended, Rhode Island’s economy shifted into a higher gear.

In light of this recent momentum, it is important reiterate the distinction between levels of economic activity and rates of growth. The Current Conditions Index is a momentum indicator. As such, its values reflect how broadly based economic activity is (i.e., the greater the number of improving indicators, the more broadly based is economic activity, indicating greater underlying momentum). It does not focus on the levels of the various indicators. So, as 2012 ended, we witnessed a broadening of economic activity that produced greater momentum, as reflected by the rates of change in the CCI indicators and our state’s economy. This says nothing about current levels. So, while Rhode Island’s economy continues to improve, driven by this added momentum, the levels of key variables like payroll employment remain well below the values they attained during the last recovery. We remain about six percent below our last employment peak, which explains the persistence of high unemployment here. According to the fourth quarter CCI performance, we are moving towards our prior peak more rapidly.

For December, all five of the non-survey-based indicators improved. Retail Sales sustained its recent strength, registering a strong 3.2 percent growth rate versus last December, its twelfth increase in the past fourteen months. Along with this, US Consumer Sentiment rose once again (+4.2%), helped by improvement in the national economy. Benefit Exhaustions, reflective of longer-term unemployment, barely fell, but its downward (improvement) trend remains intact. New home construction, based on Single-Unit Permits, surged by 35.1 percent, as home construction continues to move beyond its recent bottom. In spite of this, levels remain extremely subdued by historical standards, partly the result of the sustained declines  in our state’s population. Finally, layoffs, in terms of New Claims for Unemployment Insurance, fell sharply in December (4.9%), reversing last month’s increase.

Apparently the flawed labor market data became less problematic as 2012 ended. So, while its levels remain inaccurate, year-over-year changes have become more accurate, which explains improvements in key indicators like the Labor Force, Private Service-Producing Employment, and Employment Service Jobs. Manufacturing activity, though, has sustained it strength, as Total Manufacturing Hours rose by 3.7 percent, and our Manufacturing Wage growth slowed to “only” 4.8 percent.

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

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

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