IS NOT IN A RECESSION
More than a month ago, a new “prevailing wisdom” emerged which states that Rhode Island is currently in the throes of a recession, and this recession will not end in 1996. I find this disturbing since Rhode Island is not in a recession at the present time and “wisdom” such as this, even when inaccurate, takes on a life of its own.
The present recovery has been disappointing. Our housing sector has performed badly. Single-unit housing permits continue to decline, even though existing home sales have done fairly well. Declining manufacturing employment coupled with such slow new home construction has condemned Rhode Island to painfully slow growth rates throughout this entire recovery. Add to this both the “structural” changes resulting from our continuing transition to a service-and-information-based economy and the national “soft landing,” and it appears that we have been in a recession now for several years.
Technically, a recession, which is purely a cyclical phenomenon, is a period of six or more consecutive months with negative economic growth. At the national level, this is determined by tracking real Gross Domestic Product. At the state level, we should be able to rely on real Gross State Product (GSP). Unfortunately, 1992 is the most recent year for GSP data. Because of this lag, state forecasters have often used current payroll employment as a proxy for real GSP. Based on this measure, continuously declining employment signals a recession.
Unfortunately, in today’s economy, there are two problems with this procedure. First, a host of structural changes continue to blur the cyclical economic activity we have been experiencing. Most notable among these is the incorporation of labor-saving technology into production, corporate downsizing, health care consolidation and cutbacks in military weapons production. All of these reduce employment. Yet none are cyclical. Second, the current payroll employment figures for Rhode Island are suspect. According to those numbers, payroll employment has been declining on a year-over-year basis since May. During some of those months, Miscellaneous Service employment, our “engine of job growth,” declined. Is this likely since the recent downward trend of one of its components, Health Services, has now reversed? Only if another critical category, Business Services, has dropped sharply. Last year, employment in that category was revised sharply downward. The current “rebenchmarking” may well be understating Business Service employment. If so, its upward revision by just a few thousand jobs would be sufficient to eliminate most of the employment declines since May. My sense is that the current payroll employment numbers are too low, based on the entire set of economic indicators I track. I expect employment to be revised upward slightly with the next “rebenchmarking” in March.
This brings me to my most convincing evidence that Rhode Island is not currently in a recession, the behavior of my Current Conditions Index (CCI). I formulated this index to pinpoint exactly when the Rhode Island economy falls into a recession or moves into a recovery. It tracks twelve key economic indicators of Rhode Island dealing with the housing sector, retail trade, labor demand and labor supply. When it is above the “neutral” value of 50, our economy is expanding. Values below 50 indicate contraction. The CCI hovered around 67, denoting moderate growth, for two years. Then, as the national economy slowed in May, the CCI dropped to 58, which is consistent with a barely expanding economy. It remained at that level in June. In July, its value fell to 33, indicating contraction. Fortunately, our period of negative growth ended quickly, as the CCI returned to 58 through September. Thus, in spite of the declining employment data, the CCI remained in the expansion range for all but one month. As of September, Rhode Island was not in a recession. It was, however, as close as it is possible to get without actually being in a recession.
In October, the CCI returned to 33.
Is this the beginning of a recession?
I think not. At the present time, state income tax withholding
continues to rise by rather surprising amounts on a year-over-year
basis. While retail sales
declined in October, the measure I utilize, retail sales subject to the
sales tax, had increased in September.
Combining these two months, taxable retail sales were either flat
or falling slightly, which mirrors national retail sales for those
months. As for the October
value, though, I will conjecture that we are in a period where consumers
are spending more than they have of late on non-taxable items such as
clothing. Thus, total
retail sales may actually be rising.
Existing home sales continue to perform fairly well as do hourly
manufacturing wages and service employment.
New claims for Unemployment Insurance, a measure of layoffs, has
also performed well over the past six months.
The indicator of manufacturing activity included in the CCI,
manufacturing man-hours, has fallen very little from its value a year
All of this points to our not being in a recession.
Historically, the originators of “recession wisdom” have
based their assessment either entirely or too substantially on the
performance of manufacturing employment.
Not only is that an inappropriate measure of overall
manufacturing performance (man-hours is the preferable measure), its
predictive value as a cyclical indicator has diminished now that Rhode
Island is a service-and-information-based economy.
by Leonard Lardaro