Current Conditions Index: May 2013

Below is a partial version of the May Current Conditions Index report. The full report, which includes tables and historical data, can be found on my web site: www.llardaro.com .

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The second quarter is progressing a little better for Rhode Island than had previously been thought. It has been apparent that during the first part of 2013, Rhode Island’s economy has not displayed as much momentum as it did during the second half of 2012. And, even though the Current Conditions Index values so far this year have lagged those from the final two quarters of last year, at least this year’s values had been better than the corresponding values one year ago, with the exception of April. Based on the most recent data, the April CCI value was revised higher, from 67 to 75, so it too bettered its year-earlier value. As for May, the CCI jumped to 83, with ten of twelve indicators improving, tying its highest value thus far for 2013. Furthermore, several of the CCI indicators in May improved despite difficult “comps” last May. So, overall, several trends continue to take shape and May points to the possibility that Rhode Island may re-accelerate in the second half of 2013. This is not an unreasonable possibility, especially since the US economy will likely continue to improve as we progress through 2013. The primary question for Rhode Island is therefore, whether the improved values later this year (assuming they occur) are improvements over the prior months from last year. This will not be easy for Rhode Island, but it is certainly not out of the question for us to see this occur. Any good news like that would be more than welcome for our state, which CNBC recently referred to in its survey of the Best States to Do Business as: “A perennial loser in our study...”     

Let me state one important caveat at this point: Don’t interpret the most recent data as indicating that Rhode Island’s economy has already substantially strengthened, or that it is in the process of jumping to much higher rates of growth. What we are seeing is that after consolidating the gains from late last year, Rhode Island’s economy has begun to gain momentum, at least through May. All of this is defining how Rhode Island’s economy continues to recover from The Great Recession.

All four of the CCI’s leading indicators turned in strong performances this month, several in spite of very strong “comps.” The continued uptrend in Single-Unit Permits, a leading indicator of housing, reflects continued movement beyond the low in new home construction. Permits have now settled into a range of about 70+ per month. The remaining leading indicators are related to the labor market. The first of these, Employment Service Jobs, which includes temporary employment, a prerequisite to overall employment growth, rose by a healthy 3.5 percent in May. This indicator has consistently improved since last April. The second leading labor market indicator, New Claims for Unemployment Insurance, reflects layoffs. It appears to have resumed a downtrend, which will be critical if Rhode Island is to continue improving as we move through 2013. The final leading indicator, Total Manufacturing Hours, measures strength in our manufacturing sector. This indicator rose again (by 1.0%), its tenth improvement in the last twelve months. Together with Single-Unit Permits, there has been continuous and sustained momentum in Rhode Island’s goods-producing sector.

 
US Consumer Sentiment improved for the fourth consecutive month, in spite of a difficult comp. Related to this, Retail Sales remained strong. While Rhode Island’s goods-producing sector is performing well, its service-producing sector has fared less well. The rate of growth in Private Service-Producing Employment remains well below a one percent rate (+0.4% in May). Its level has stabilized around 350,000.

RI's Economic Realities and the Reorganization of the EDC

This is an article I wrote in mid-May and submitted to The Providence Journal. They never  published it, which is unfortunate since the realities of the economic climate this state finds itself in have been entirely absent from the public discussion of potential changes to the EDC and any reorganizations that may occur.

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In recent days we have seen competing legislative proposals that seek to improve Rhode Island's approach economic development. These are clearly welcome and something we have to do. While these proposals contain a number of potentially significant differences, what has yet to be done is to outline several critical considerations that any such plan for Rhode Island must ultimately include.

There are a number of general principles that such plan must acknowledge. First and foremost, Rhode Island is a post-manufacturing economy and has been so for over twenty-five years. In a post-manufacturing economy, when layoffs occur, those jobs are often eliminated, resulting in permanent job separation. Therefore, during recoveries, it is necessary to create new jobs from scratch, which is both more risky and costlier than it was during the manufacturing era when workers were largely able to return to their prior jobs. Therefore, layoffs occur in both good times and bad, so job loss consistently accompanies job gains. While Rhode Island has seen job loss drop sharply since The Great Recession, job gain has remained sluggish, even as our economy has improved.

Second, back when Rhode Island was a manufacturing-based economy, changes were largely cyclical in nature. The economy would therefore turn itself around as soon as cyclical forces corrected themselves and quickly began producing more jobs and output, resulting in strong recoveries. Today, the economy doesn't just turn itself around because structural changes routinely accompany cyclical factors. Perhaps the greatest challenge in this regard is technology-induced gains in labor productivity. In order for a state to grow more rapidly, it must therefore earn it through proactive and continual improvement in its economic climate.

In light of these general principles, Rhode Island will need to initiate three institutional changes. The first of these, as acknowledged by the different plans, is the creation of a Council of economic advisers (CEA). However, unlike what has been described thus far, the CEA should not be relegated to merely gathering and disseminating data. That task is far more effectively accomplished using existing agencies such as the DLT. Instead, the CEA should define the specific data that need to be gathered in order for it to conduct in-depth economic analyses and to make policy recommendations.

For example, at present, Rhode Island has no idea how large its non-defense tech employment is. The CEA as I envision it would therefore commission the ongoing collection of that data through time, by industry, and by firm size, analyze it, determine both Rhode Island's strengths and weaknesses in this area, and make policy recommendations for meaningful and ongoing improvements.

What will become of this analysis undertaken by the CEA and its recommendations? That should form the basis of Rhode Island's economic plan. It is apparent from existing discussions that the proposers don’t really comprehend what such a plan would ultimately be or what should go into that plan. Worse yet, they seem to believe you can somehow come up with a plan, abandon it for four years, then dust it off and start again. In a post manufacturing economy that will never do. Any plan must be an ongoing and primary vision for the state's future based on in-depth economic analysis.

Finally, Rhode Island must create in-house capability to perform due diligence. This is the necessary condition for enlightened decision making. Its absence has been at the heart of many of the problems we have experienced over the past decades.

This newly instituted due diligence capability should be performed exclusively by economists with advanced degrees who have documented experience in undertaking such research (which includes the use of economic impact software). Once a culture of due diligence has been created, we will quickly learn the economic variables that matter, their interactions, and the actual magnitudes of their impacts. This knowledge can then be disseminated in digital form as reference not only for persons in state government, but to citizens of the state as well. Perhaps most importantly, this capability would at long last equip Rhode Island with the tools needed to combat “the numbers” provided by the various special interest groups.

Let me conclude by noting that the greatest change required in all of this will be attitudinal: If Rhode Island is to become far better managed, the culture of denial so prevalent in the approach of our state's elected officials to economic matters must end. Most importantly, as a matter of practice, accuracy has to supersede tone. I can't emphasize this point enough.

Are Rhode Island's elected officials capable of such attitudinal and institutional changes? I certainly hope so, since Rhode Island's future economic viability is tied to this. It isn’t too late for us to adapt to the kind of world we have been living in for the last twenty-five years and to stop assuming, or should I say, hoping, that our state’s economy will turn itself around and everything will be fine.

 

 

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 .