BACKGROUND

The Current Conditions Index (CCI) is a monthly indicator that details the present state of the Rhode Island economy by following the behavior of twelve key economic indicators pertaining to housing, retail sales, fiscal pressures, the employment situation, and labor supply:

·        Government Employment

·        Employment Services Jobs*

·        Retail Sales

·        University of Michigan US Consumer Sentiment Index**

·        Single-Unit Housing Permits

·        Private Service-Producing Employment***

·        Manufacturing Man-hours****

·        Average Hourly Manufacturing Wage

·        Seasonally Adjusted Unemployment Rate

·        Resident Labor Force

·        New Initial Claims for Unemployment Insurance

·        Unemployment Insurance Regular Benefit Exhaustions

The CCI ranges from 0, when no indicators improve compared to year-earlier levels, to 100 when all twelve show improvement. Values above 50, the "neutral" value, indicate that the Rhode Island economy is expanding, while values below 50 are indicative of contraction. Prior to "The Great Recession" that began in June of 2007, the CCI had never attained a value of 0, indicating that no indicators improved relative to year-earlier values. This changed in 2008 when the CCI fell to 0 on three occasions, and in 2009, when another value of 0 was recorded. Prior to this, the low for the CCI had been 8, which occurred for only a single month on several occasions. For almost all of 2008, the CCI recorded values of 8. The CCI attained its maximum value of 100 on several occasions, for almost all of 1984 and once in 1986. Note that these values occurred exclusively when Rhode Island was still a manufacturing-based economy.

* Up until February 2006, the CCI used Help Wanted Advertising for Providence, RI, as one of its indicators (and toward the end of its use, an econometric adjustment was required). This indicator replaces Help Wanted Advertising.
** Prior to the October 2001 report, the CCI used Existing Home Sales in Rhode Island. This indicator replaces Existing Home Sales. 
*** Prior to the January 2003 report, Miscellaneous Service Employment, a major category of the SIC codes, was used. Now that NAICS has replaced the SIC codes, the current indicator was chosen to replace Miscellaneous Service Employment.
****Beginning with the November 2005 report, Manufacturing Man-hours will be referred to as Total Manufacturing Hours.

THE CCI THIS MONTH

MONTHLY HIGHLIGHTS:

 I was hoping that October would extend the momentum gains experienced by the Rhode Island economy in September, where the Current Conditions Index finally rose into the expansion range (=58) and was improving on a monthly basis for three months. Unfortunately, that was not meant to be. The Current Conditions Index for October fell back to 50, its neutral value, as only six of the twelve indicators improved relative to a year ago. Of course, this is not the end of the world, but it is somewhat of a setback in terms of the cyclical momentum of Rhode Island’s economy. What all these numbers reflect is the uneven nature of our state’s current economic climate, where despite parts of the economy not performing well on average, there are still areas of strength.

October marked the fourteenth consecutive month for which the Current Conditions Index failed to exceed its year-earlier value. But there were several encouraging signs, even with this month’s neutral value. Retail Sales remains very strong, rising by 5.9 percent in October relative to a year ago.  That is very encouraging in light of housing weakness, where we continue to witness ongoing declines in Single-Unit Permits, reflective of new home construction. In October, it fell by 8.8 percent, which is somewhat good news seeing that it had fallen at double–digit rates on a yearly basis for quite some time. Generally, housing and Retail Sales are highly correlated, for obvious reasons. If and when Retail Sales enters a sustained downtrend, we will know that there are real problems with our state’s economic momentum. For now, that seems like a distant concern.

Perhaps the best news this month is that Rhode Island’s Labor Force actually rose on a yearly basis for a second consecutive month, and it has now increased for seven months. This will help ease labor shortages and could moderate wage growth. The most important thing, however, is that when the Labor Force rises, persons who are unemployed enter or re-enter the Labor Force, often causing the Unemployment Rate to increase. So, increases in the Unemployment Rate do not necessarily signal economic weakness, as long as they are accompanied by an increased Labor Force.  Since Rhode Island’s labor force participation rate (see table) remains well below its 2007 value, however, the official (naïve) rate is not an accurate reflection of labor slack in our state’s economy. The far more accurate Participation-Adjusted Unemployment Rate remained at 4.5 percent in October and has been decreasing over the last several months.

Looking at the strong October performers, US Consumer Sentiment sustained its recent strength, rising by 6.6 percent in October, continuing a string of improvements that began in February. The Manufacturing Wage rose by 7.2 percent, well above the rate of inflation. As stated earlier, Retail Sales rose sharply, and, in a rarity for Rhode Island, our Labor Force actually rose on a yearly basis. Finally, Government Employment ended a recent pair of consecutive annual declines, rising in October by 1.1 percent.

Unfortunately, it was not very difficult to find negatives in October. New Claims, reflective of layoffs, failed to improve after falling for two months (+14.2%). Total Manufacturing Hours extended its well-defined downtrend, falling for an eleventh consecutive month (-4.0%). Employment Service Jobs, which include “temps,” and is a leading economic indicator of job gains, has now declined for thirteen consecutive months, this month by 5.5 percent. As noted earlier, Single-Unit Permits, or new home construction, declined by 8.8 percent in October. And Private Service Producing Employment (non-manufacturing and non-government employment) fell for the seventh consecutive month, by 0.9 percent. Benefit Exhaustions, which reflect long-term unemployment, surged by 34.7 percent in October, its seventh consecutive double-digit increase.

Has Rhode Island emerged from its “statistical recession”? As of October, the answer is no, but it appears that momentum may be moving us away from that designation. There were several strong indicator improvements this month, but the indicators that failed to improve did so with very disappointing values that have generally been sustained. However, several critical non-CCI indicators are showing promise. Resident employment rose on a yearly basis for the fourth consecutive month and on a monthly basis for seven months, although payroll employment (the number of RI jobs) fell again, by 2,500 (Job gains = 3,300, job losses = 5,800, see below). Revisions to the labor market data should shed light on whether this divergence is accurate or not. Let’s hope those revisions are not as brutal as those of last year!