ARE YOU INFORMED ABOUT RHODE ISLAND'S ECONOMY?

The Providence Business News, January, 1996

As we begin the new year, we continue to be affected by economic forces that occurred in 1995 along with a host of trends that have been around for several years. How well informed are you about our state’s economy? Permit me to pose four questions that test your knowledge of Rhode Island’s current economic climate. If you get two or more correct, you are far more informed than the "average" Rhode Islander.

1. Was Rhode Island’s 1994 ranking for per-capita personal income (the most recent year available) 19th or 43rd among the 50 states?

Both. In terms of the level of per-capita personal income, our value of $21,948 ranked us 19th (compared to the US average of $21,699). When the growth rate is considered, Rhode Island, like most of New England, performed badly. Our per-capita personal income growth in 1994 was only 3.4%, which gave us a rank of 43rd in the growth rate category. This distinction between levels and growth rates lies at the heart of the divergence in rankings for Rhode Island in various surveys. We currently have reasonably high levels for many key variables while their growth rates are meager. Unfortunately, future levels depend on current growth rates, so there is cause for us to be concerned about our slow-growth environment.

2. Are jobs currently being created in Rhode Island?

Yes. The monthly payroll employment change does not reflect the number of jobs created. Instead, it is the difference between the number of jobs created and the number lost for that month. So, even if the monthly employment change is negative, this indicates that more jobs were lost than were created. In November of 1995, for example, payroll employment fell by 2,300 compared to November, 1994. This figure was the result of 5,600 jobs lost and 3,300 created, using two-digit SIC data. If the data are further disaggregated, an even larger number for job creation results. In past recoveries the monthly payroll employment change was a fairly reasonable approximation for job creation. Today, with our continuing transformation from a manufacturing to an information and service-based economy, there has been continuous job loss throughout this entire recovery.

3. Is manufacturing in Rhode Island dead?

No. We are clearly not without problems in this sector, but the "desperate straits" characterization typically presumed is largely lacking in terms of a factual basis. To most people, the health of manufacturing can be gauged by employment changes in that sector. Once upon a time, that was an accurate measure of overall manufacturing activity in our state. In the present climate, with substantial regional and international competition, the need for continual cost-cutting dictates the introduction of labor-saving technology and downsizing. Thus, employment change has become a far less accurate measure of manufacturing activity, since output, the measure of primary interest, rises even though employment is declining when technological advances are introduced. Our "problems" result from situations where production declines. Part of this, the result of defense cutbacks, is largely out of our control. The exodus of manufacturing firms from this state and the failure of existing firms to expand here is the problem we must confront (see #5 below). On a more positive note, if we alter our focus to manufacturing man-hours, we find no decline during the last several years - these have hovered around the 3.5 million level throughout this entire recovery. Also, if we broaden the definition of manufacturing to include services, then employment in manufacturing goods and services has been rising for some time in Rhode Island.

4. True or false: the housing sector is the one part of our economy that has sustained us throughout this entire recovery.

False. New home construction (measured by single-unit building permits) has performed badly throughout this entire recovery. Usually, this measure grows rapidly during the early stages of a recovery, and, as the result of "multiplier" effects, adds further momentum to the recovery. Throughout most of this recovery, permits for Rhode Island have been stuck in the range of 2,200 and 2,500 annually. In October of 1995, however, this changed, as single-unit permits dropped below the 1,900 annual level, a value reminiscent of the depths of our last recession. By this time in the recovery of the 1980s, housing-permits had more than doubled from their recession levels. Clearly, one of the reasons this recovery has failed to sustain any upward momentum whenever such momentum has occurred is the sub-par performance of our housing sector.

Finally, let me pose a question that dwarfs the four above in terms of its relative importance in determining Rhode Island’s future. Permit me to confess that I have been unable to come up with a viable answer to this question.

5. What is Rhode Island’s economic niche?

by Leonard Lardaro