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BankRI, Lardaro on the Economy Series
September 2004

Rhode Island’s economy has experienced some notable breaks with historical patterns over the last few years. Payroll employment here outpaced national growth for two years. Our unemployment rate was below the national jobless rate for two and a half years. The severity of the last recession for us was far less than for the nation as a whole and the other New England states.
In the first half of 2003, Rhode Island flirted with, but ultimately avoided a double-dip recession. Things picked up noticeably during the second half of 2003 and into the first quarter of 2004. That’s where the party apparently ended. Our economy slowed after February. Payroll employment in July was virtually identical to its value in January of this year. And, our unemployment rate has not matched or exceeded the national rate for the last four months. At present, Rhode Island’s economy is moving sideways. What lies ahead?

First, the good news. The national economy will move out of its recent “soft patch” by the end of the third quarter, returning to more solid growth, albeit at rates below what was predicted early this year. As this occurs, Rhode Island’s economy will grow more rapidly as well. While Rhode Island will still retain the “excess baggage” of problematic job growth and above-national unemployment rates, these will become less dominant as the other parts of our economy improve. As was true in the 1990s, some of the reductions our state’s unemployment rate will result from our residents securing jobs in Massachusetts and Connecticut. And, with new firms being created, it will be difficult to track all of the payroll employment jobs that will be occurring. But the risk of a severe backslide in the second half is not that great, unless the major risk(s) to this forecast occur: terrorism acts and/or dramatic rises in energy costs.

This takes us to the bad news. I think that much of what the media has been focusing on, and some government statistics are missing, is the severity of the “pinch” being felt by so many nationally and in Rhode Island. Yes, gasoline prices have risen and remain high. But it’s worse than that. I don’t have to tell anyone reading this article how often “price shock” occurs – when we gas up our cars, when we go grocery shopping, when we pay our auto and health insurance bills, and as we plan for how much heating will cost this winter.

Perhaps the most “unsung” risk for Rhode Islanders is the last item – how cold of a winter this will be. If we have a very severe winter, oil prices will be pushed up sharply, which either will reverse earlier declines if oil prices should weaken in the short-term, or could push oil into the $50-$55 per barrel range if no short-term relief occurs. I view $65 per barrel of oil as the point at which the “R” word (recession) becomes a real possibility. And, given that Rhode Island’s economy is currently moving sideways, we have very little margin for error. In this worst case scenario, Rhode Island might possibly experience a mild recession if the nation only flirts with recession.

Let’s be optimistic. Oddly, though, that means cheering for a warm winter and falling oil prices.


by Leonard Lardaro

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