The Current State of the Rhode Island Economy:
May 2000

As we move into the third quarter of 2000, Rhode Island's recovery remains broadly based, although overall momentum appears to be diminishing. Almost every sector of Rhode Island's economy continues to improve. Happily, even those parts that have faltered have seen activity remain at historically favorable levels.

The basis for this assessment is the behavior of the Current Conditions Index (CCI) I formulated. Recall, the CCI is a broadly based diffusion index that tracks the behavior of twelve critical economic indicators on a monthly basis. The CCI measures the breadth of overall economic activity, not its velocity. It ranges from 0 (when no indicators are improving on a seasonally adjusted year-over-year basis) to 100 (when all 12 indicators improving year-over-year).  Values above 50 indicate expansion, while a CCI below its "neutral" value of 50 reflects contraction.

The most recent month for which the CCI has been calculated is April. April brought good news and bad news. The good news was that the March CCI was revised upward to 100 — a perfect score, indicating that all twelve indicators improved. The bad news: the April CCI was only 67. Quite a one-month drop!

Only eight of the twelve indicators improved in April, and a very clear pattern emerged: Rhode Island’s housing market is beginning to slow. While new home construction, in terms of Single-Unit Permits, has been sluggish for some time, only breaking the 2,500 annual unit plateau about a year ago, Existing Home Sales have been very strong, setting record after record. In April, both of these indicators declined at double-digit annual rates: Single-Unit Permits fell by 16%, while Existing Home Sales declined by 14.3%.

Certainly, a lack of available supply  is one of the forces constraining home sales. But, this large a drop likely signals the beginning of a period where both gains and declines will coexist. This is precisely what the Federal Reserve (FED) is hoping to accomplish. Expect this trend to persist for some time since the FED has not yet finished raising interest rates.

Perhaps the greatest irony for April is that while housing, an interest-sensitive sector, slowed, Retail Sales, the other key interest-sensitive indicator, continued its blistering pace, growing at an 11.1% annual rate! So, while Rhode Island’s economy has remained largely immune to the effects of FED tightening until now, expect to see more of the after-effects of monetary policy in the coming months.

The labor market remained strong in April, although the picture was somewhat mixed. Employment growth was a very respectable 1.7 percent, led by job gains in retail trade, business services, construction, and local government. Benefit Exhaustions fell by a dramatic 12.7%, the third consecutive double-digit decline. But, New Claims, a measure of layoffs, rose by 7.4%, their first increase in over a year. Help Wanted, a measure of the strength of labor demand, attained its highest level in this entire recovery (64% of its 1987 value). Was this jump in Help Wanted the result of firms advertising more than they normally would in an attempt to generate any applicant interest in this labor shortage environment? There is no way to know at this time.

Finally, Rhode Island’s Unemployment Rate fell to a recovery low of  3.7 percent, marking the fifteenth consecutive month of full employment  April’s combination of a 3.7% unemployment rate and a 0.3 percentage point decline from last April’s value gave Rhode Island a Jobless Improvement Index rank of #35.

April ‘s performance is a preview of the slower rates of economic growth we can expect to see in coming months. This isn’t the end of the world. But it won’t be as kind and forgiving as the pace we have become accustomed to.

The table below gives the performance of the twelve indicators that comprise the CCI of January through April of 2000 compared to the same four month period last year. The most striking recent performances among individual CCI components are:

·        Existing Home Sales: after a series of records in the 1990s, this indicator has finally begun to level off. Through April 2000, sales were 2.2 percent below their level during the first four months last year. Rising interest rates have thus not had a terribly large negative impact on sales momentum yet. But, slowing will continue in the near term. As long as the unemployment rate remains low, and both job creation and consumer confidence do not weaken, a great deal of strength in existing home sales will remain, although we will not set another sales record this year.

·        Retail Sales: Prior to the opening of the Providence Place Mall, retail sales in Rhode Island had been growing at rates approaching double digits. Now that the mall is open and the economy has been performing so well, retail sales are continuing their stellar performance. Through April, retail sales were 12.6 percent above their level for the same period last year, in spite of the rate hikes to date by the Federal Reserve. Expect this blistering rate of growth to decline.

·        UI Benefit Exhaustions: This has been one of the stellar economic indicators for years now. Last year, as Rhode Island lost some momentum at years end, exhaustions began to trend upward, threatening to end long periods of double-digit declines. Fortunately, as growth re-accelerated in the first part of 2000, exhaustions have resumed their downward trend. Through April, exhaustions were 13.5 percent below their level last year. 

·        New Claims for UI: This is the best available (i.e., most timely) indicator for tracking layoffs. Like Exhaustions, new claims have fallen a great deal over the last couple of years. Year-to-date in 2000, new claims have fallen by a very respectable 8.7 percent. Since New Claims are sensitive to slowing in the rate of growth, both regionally and nationally, there is some question concerning the likelihood of sustaining current rates of improvement through next year.

·        Labor Force: After eighteen months of consecutive year-over-year declines that ended in March of 1998, Rhode Island’s labor force began a period of rapid growth in 1999, reaching or approaching 2 percent annual rates. Year-to-date as of April, our labor force is up a healthy 1.3 percent. How long will a state with marginal population growth (at best) and strong (for us) job growth rates be able to sustain such lofty growth rates? 

·        Unemployment Rate: This was revised higher for 1999, and we finally went below the 4 percent level in the fourth quarter of last year. The good news continues to be that Rhode Island is currently at full employment (at or below a 4.2 percent unemployment rate). It has been at full employment now for fifteen consecutive months, a feat many of us wondered if we would ever see in this millennium. The bad news is that Rhode Island’s rate of unemployment has moved back its more “traditional” place of being the highest in New England.

      So, while our economic momentum will slow a bit in the coming months, our recovery will continue to be fairly broadly based. We have managed to regain the momentum that dissipated at the end of 1999. Once again Rhode Island finds itself in the happy situation of continuing to have some “margin for error” as it moves towards the next cyclical peak.

 Leonard Lardaro, Ph.D.