DEFICITS POSE THREAT
Lately, Rhode Island’s labor market has been on a roller coaster. Looking at the most recent two months, we see what appears to be a rather discouraging picture. For March, our unemployment rate declined significantly, but that was largely the result of unemployed Rhode Island residents dropping out of the labor force. Then in April, our unemployment rate rose from 4.2 to 4.5 percent.
While the national economy has clearly slowed of late, is this merely Rhode Island reflecting what is happening nationally? Actually, the different ways of gauging Rhode Island’s labor market performance give very different answers to this question. First, there are two separate labor market surveys. Unemployment data are derived from a survey of households each month, while the other survey deals with Rhode Island employers (the establishment survey), and the number of jobs in Rhode Island.
The first thing to consider is the time frame used in any comparison. Focusing on monthly changes, things don’t look particularly good based on the household survey. But, like the weather here, wait a while and the discouraging statistics might well be changed. Because of the likelihood of revisions erasing what might be troubling initial impressions in the data, it is also necessary to focus on yearly changes. Not only do these tend to be revised less, they tend to suffer less from the vagaries of “seasonal adjustment.” Let me suggest a framework for you to use in thinking about these two time frames. You should think of the yearly changes as establishing the overall trend’s direction and underlying momentum. The monthly change, by contrast, shows the acceleration or deceleration in that trend. Returning to the unemployment data for the past two months, this clearly shows a deceleration in our overall trend. What was that trend? Significant improvement. The labor force continued to rise (on a yearly basis) in March, but by ever-decreasing amounts, which was picked up with the recent monthly changes. This trend has potentially reversed, however, as the labor force declined on a yearly basis in April for the first time since December of 2004. Keep in mind that on a yearly basis, the number of unemployed here had declined by 5,800 in March. So, perspective matters a great deal!
Permit me to sound like a broken CD, though, and remind readers not to focus as much as people here seem to on the unemployment rate, if for no other reason than it is a lagging economic indicator. A preferred indicator, which comes from the other labor market survey, is payroll employment – the number of jobs in Rhode Island. While everyone was so busy focusing on the unemployment rate’s potentially disturbing trend, something went almost unnoticed: payroll employment growth here accelerated starting in the last quarter of 2006. I was aware of this, and the uptick in my Current Conditions Index (CCI) reflected this heightened pace. More importantly, one of my CCI indicators, Employment Service Jobs, is itself a leading economic indicator. It began growing at double-digit annual rates beginning in October of last year and has continued that pace through April. This bodes well for Rhode Island’s labor market in the coming months, contrary to what the household survey has been indicating.
What we are witnessing may well be the latest example of a long-term pattern: when the national economy slows, Rhode Island’s economy improves relative to national activity. Manufacturing has fallen to just over 10 percent of total employment in Rhode Island. Also, our housing market has not suffered as much as it has in a number of other parts of the country. Avoiding this “dangerous duo” may well be the primary reason behind the improvement in our relative performance, since we have become less cyclical than we once were.
But don’t view this as lasting too long. Rhode Island has major budget deficits to contend with. Starting July 1, with the beginning of the new fiscal year, the magnitudes of these deficits rise to levels that will almost certainly slow our recent economic momentum. In game show parlance, in July we move into the “lightning round,” where the totals double and things move really fast. The way we balance these budgets will be a major determinant of our future rates of growth. If we continue to engage in piecemeal policy, don’t expect great things in our future. Hopefully, our leaders comprehend the severity of our fiscal crisis and are willing to make the difficult but important changes that are necessary before our state’s economy can consistently approximate national rates of growth.
by Leonard Lardaro