STATE ECONOMY NOT PERFORMING BADLY BASED ON NEW 'REBENCHMARKING'
The Providence Business News, March, 1996
The economic data released at the end of 1995 were anything but encouraging. Payroll employment was said to have fallen on a year-over-year basis for every month from May through December, resulting in a slight employment decline for the year. Just a few weeks ago, another deathknell was sounded: income growth for the third quarter of 1995 (the most recent available) was a meager 0.8 percent, giving Rhode Island the rank of 49 out of 50! As employment goes, so too does income.
Now, as 1996s first quarter ends, the stream of revised and more accurate data for 1995 are just beginning to be released. Perhaps the most eagerly awaited of these is the data series for payroll employment. The most precise employment data, which is based on the largest sample of employers, are the ES 202 data. Until recently, the published "202" data extended only through the end of the third quarter of 1994. From that point onward, data based on a much smaller sample, the "790" series, formed the basis for the monthly employment figures released by the Department of Employment and Training (DET).
Updated 202 data are released along with January employment numbers each year. So, when the DET recently released its January employment numbers, it had extended the range for the ES 202 data through the end of the second quarter of 1995. Employment values from July, 1995 through January, 1996 consist entirely of 790-based estimates.
In order to update its employment data, the DET must adjust the size and level of the 790 sample to reflect the more accurate and updated ES 202 results. Some of the employers in the more recent 202 survey were not included in the previous sample. The 790 data must be revised upward to account for these employers. Likewise, some of the previously included employers are no longer in business, which requires downward adjustments. Finally, a correction must be made for the differences between the employment levels indicated by the new ES 202 and those of the original 790 series. The process of making this entire set of changes is known as rebenchmarking.
Data rebenchmarking occurs every year at this time. Often, the resulting changes are unspectacular. This year, the results were shocking (see the graphs accompanying this article). As I noted above, payroll employment for 1995 was originally thought to have declined slightly, with year-over-year declines every month from May onward. With such a stagnant economy, income growth in the third-quarter, +0.8% in dollar terms and +0.2% in real terms came as no surprise. The rebenchmarked data, to quote a car commercial, changed everything.
The data for 1995 now indicate that employment rose in 1995 by 6,700 over 1994 values, making Rhode Islands employment growth for 1995 equal to 1.45 percent. All of the major employment (SIC) categories saw rebenchmarking changes. The two most striking for 1995 occurred in Manufacturing (-2,000) and Miscellaneous Services (+5,700). The implications of these changes are far reaching. First, as Rhode Island is now primarily a service and information-based economy, employment gains in that sector continue to more than offset losses in manufacturing. Second, manufacturing employment is apparently becoming increasingly difficult to track with the 790 survey. Third, the strong upward revision in services, along with the difficulty counting the number of employees in manufacturing, indicates a growing presence of the types of establishments these surveys find most difficult to track: both small and new firms.
The implications of these rebenchmarking changes for the political and economic debates currently taking place is enormous.
THE RHODE ISLAND ECONOMY IS NOT STAGNATING. As my Current Conditions Index has consistently showed, we are not in a recession. Its relatively low values at the end of 1995 were the result of the "reality check" that housing continues to largely be absent from this recovery and manufacturing losses continue.
NOW THAT EMPLOYMENT HAS BEEN REVISED UPWARD, INCOME GROWTH MUST ALSO BE INCREASED TO BE CONSISTENT WITH THE EMPLOYMENT DATA. Statistically, Rhode Islands revised economic performance in 1995 removes it from the status of being one of the slowest growing states in an underperforming region and places us at or near the front of the pack in New England and close to the national average in employment and income growth for 1995!!
A GREAT DEAL OF ENTREPRENEURIAL ACTIVITY IS CURRENTLY TAKING PLACE IN RHODE ISLAND. The fact that we are so unable to track where these employment gains are occurring should actually be viewed as encouraging news. And, the fact that the pace of new business formation appears to be healthy in a state that is notorious for its "high" cost of doing business, is what now must be studied in detail. Of course, this employment behavior should not be used as an excuse to stop lowering our business costs further.
THE MAJOR FISCAL PROBLEM IN RHODE ISLAND IS EXPENDITURE - LEVELS AND TYPES. State income tax withholding rose in 1995 by 4.6 percent over its 1994 levels. Over that same period, retail sales rose by a healthy 3.7 percent. These are not recession levels. Our states deficit is not the result of a collapsing state economy and declining tax revenues. The new buzz phrase should now become STRUCTURAL DEFICIT. If you think our deficit was bad in FY 1995, can you imagine what it would have been had employment actually been as bad as we were led to believe? The challenge facing Rhode Island is to direct its expenditure toward endeavors that promise to continue our recent economic successes and basic "safety net expenditures." We must therefore be sure to differentiate between investment-oriented expenditures and those that are purely consumption oriented in nature.
by Leonard Lardaro