Current Conditions Index: October 2013

Below is a partial version of the October 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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Rhode Island began the fourth quarter by continuing its positive, though not exactly stunning, momentum. Once again, there was both good news and bad news concerning Rhode Island’s economic performance. First, the good news: the Current Conditions Index rose from 67 (revised down) in September to 75 in October, as nine of its twelve indicators improved. Importantly, several of those improvements were quite stunning. The bad good news emerges when we contrast our state’s performance this year with that in 2012: for a third consecutive month, and the fourth time in five months, the CCI has failed to exceed its year-earlier value. I strongly suspect that this will be the dominant pattern throughout the fourth quarter. If this conjecture proves correct, which I believe it will, we will experience a slowing in our rate of growth relative to the end of last year. One could argue that the late-2012 acceleration confronts us this year with a difficult “comp,” which is true. However, as our state’s current rate of growth is not terribly rapid (Rhode Island’s growth rate in real state GDP for 2012 was only 1.4%), the test of how robust this recovery will ultimately prove to be will be defined by our ability to accelerate rather than sustain growth rates comparable to what we observed at the end of 2012. Fortunately, the US economy is growing more rapidly, which will clearly benefit Rhode Island.

One hint of future momentum can be inferred from the October performance of the leading indicators contained in the CCI. For October, four of the five leading indicators improved in spite of difficult “comps” from a year ago. The only leading indicator that failed to improve, US Consumer Sentiment, fell sharply (-11%), but this was heavily influenced by a one-two punch: the combination of the government shutdown and its rise of over 37 percent last October.  While October was the second consecutive decline for Sentiment, it remains in a well-defined uptrend that will likely continue as long as the stock market continues to rise.

So, while our state’s economic momentum appears to be slowing a bit, substantial momentum remains, based on the performances of both the leading indicators contained in the CCI and several of its non-leading indicators. Sadly, this means it will take longer for us to return to our prior peak in economic activity. Welcome to our world! Our elected officials have yet to fully grasp that success in a post-manufacturing economy requires consistent and persistent effort to make improvements to a state’s economy, not merely waiting for things to “turn around.” 

All of the remaining leading indicators improved in October. The uptrend in Single-Unit Permits, a leading indicator of housing, continued with a vengeance, rising 61.3 percent relative to last October. Clearly, Rhode Island’s housing sector is continuing to move well beyond its recession trough.  Employment Service Jobs, which includes temporary employment, a prerequisite to overall employment growth, rose by a healthy 4.2 percent in October. It has declined only once in over a year and it remains in a clear uptrend. New Claims for Unemployment Insurance, the most timely measure of layoffs, improved in October, falling by 8.9 percent in spite of a very large decline last year (-9.8%). Unlike the leading indicators discussed earlier, this indicator is not in a well-defined downtrend at present. Should it begin to rise, it would threaten our state’s future momentum, since a trend of rising layoffs would adversely affect other CCI indicators in coming months, most notably Retail Sales. The final leading indicator, Total Manufacturing Hours, which measures strength in our manufacturing sector, rose by 2.4 percent in October. This indicator has improved for ten of the last twelve months, something I never thought I would see again, especially as one of the foundations of our recovery’s momentum.

Current Conditions Index: September 2013

Below is a partial version of the September 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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Rhode Island ended the third quarter on a fairly positive but mixed note, as there was both good news and bad news about our state’s performance. First, the good news: the Current Conditions Index rose from 67 in August to 75 in September, as nine indicators improved overall. Several of those improvements were very substantial changes. The bad good news comes when we contrast our state’s performance this year with that last year: for a second consecutive month, and the third time in four months, the CCI failed to exceed its year-earlier value. During the fourth quarter, it is not unreasonable for us to expect to see this pattern repeated every month. This has been a concern of mine for some time now, and I have written about it in the last few reports, for if this does come to pass, as is likely, it would reflect a definite slowdown in our rate of growth relative to the end of last year.  However, in light of the clear acceleration in the pace of economic activity for Rhode Island as 2012 came to an end, this does not come as much of a surprise. The October CCI results will be quite interesting, as they will reflect not only the fiscal drag from Washington, but the effects of the government shutdown as well. 

In light of these uncertainties moving forward, it is informative to examine the performance of the leading indicators contained in the CCI. For September, three of the four leading indicators improved in spite of difficult “comps” from a year ago. The only leading indicator that failed to improve, US Consumer Sentiment, fell only slightly (by 0.3%), but this relatively small decline occurred relative to a rise of over 33 percent last September.   

So, as we move into the last quarter of 2013, our state’s momentum may be losing a step or two, but a substantial amount of momentum remains, as attested to by the performances of both the leading indicators contained in the CCI and several of its non-leading indicators. This means we will just have to wait longer to ultimately return to where our state’s economy was prior to the Great Recession. Our recent rates of growth applied to the depressed activity levels Rhode Island fell to will continue to generate relatively small changes in the actual activity levels.

As stated earlier, three of the CCI’s four leading indicators improved in September. The uptrend in Single-Unit Permits, a leading indicator of housing, continues, as we have moved well beyond our recession trough (note: the September Permits value is an estimate as the government shutdown has caused a delay in its release until next week). US Consumer Sentiment failed to improve for the first time since January. However, it had an extremely difficult “comp” from last September. In spite of this temporary setback, Sentiment remains in a well-established uptrend that promises to continue as long as the stock market continues to improve.

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 3.4 percent in September. Its decline last month was the first in over a year. Like US Consumer Sentiment, this one-month problem does not threaten its longer-term uptrend, something that will be important as we move to the last quarter of this year. New Claims for Unemployment Insurance, the most timely measure of layoffs, improved in September, falling by 7.9 percent in spite of a very large decline last year (-25.1%). At present it has no clear trend, which is potentially problematic since a trend of rising layoffs would adversely affect other CCI indicators in coming months. The final leading indicator, Total Manufacturing Hours, which measures strength in our manufacturing sector, rose by 1.6%.