The Strange Math Of RI's Present Recovery

THE STRANGE MATH OF
R.I.'s PRESENT RECOVERY

The Providence Journal, Sunday Money & Business Page, October, 1998

One of the most striking aspects of the current recovery has been a series of misleading numbers that have appeared over the past few years. While it is always tempting to focus only on the value for the most recent time period, it is generally preferable to view economic statistics within the broader context of their recent trend.

So, if a newly released number seems to indicate a large increase from a previous value, does this indicate strong growth in that statistic? Not necessarily. A more balanced assessment of that statistic can be obtained by considering the most recent two or three periods along with the newly released value. The same principle pertains to apparently weak growth, or statistics that seem to indicate a slowing in the rate of growth.

The first two points below illustrate the need to consider growth rates over a period of two or more years to correctly discern whether the new statistic reflects strength or weakness.

Payroll employment for 1998 is projected to grow by 1.4 percent, an acceleration from its 1997 growth rate of 1.7 percent. Seems odd. Consider the fact that 1997s employment growth of 1.7 percent came after a year with employment growth of a meager 0.3 percent. So, considering two-year periods to more accurately gauge Rhode Island’s employment momentum, the average of the 1996 and 1997 values is 1.0 percent, while the average of the 1997-1998 values (note: the 1998 value is my projection) is 1.55 percent. In other words, a smaller growth rate following a strong year is preferable in this instance to rapid growth following a weak year. So, how much is employment growth really slowing in 1998?
In 1997, goods exports from Rhode Island firms rose by 18.5 percent, less impressive growth than its neighboring states of Massachusetts, which had 12.7 percent growth, and Connecticut whose exports grew by 14 percent. The celebration in Rhode Island about its rapid export growth in 1997 was a bit premature, since no context was presented. Consider what happened in the two years preceding the 1997 value. Of these three states, Rhode Island was the only one for which exports actually declined in both of the prior two years. In fact, for the first five years of this recovery (through 1996), Rhode Island’s goods exports rose by less than one percent – in total. But, since Rhode Island tends to lag the nation in many economic measures, for us, it’s better late than never. Returning to export growth, the values for Rhode Island in 1995, 1996, and 1997 were -2%, -1.7%, and +18.5%, respectively, making the celebrated 1997 value of goods exports 14.2 percent higher than it was in 1994. For Connecticut, the three annual growth rates were +1%, +2.4%, and +14%, respectively, while for Massachusetts, the corresponding growth rates were +15.3%, +6.2%, and +12.7%, respectively. So, does the highest 1997 growth rate win? It shouldn’t in this instance. The difference between 1994 (after which Rhode Island’s declines occurred) and 1997 values of exports indicates growth of 14.2 percent for Rhode Island, 21.8 percent for Connecticut, and 38 percent for Massachusetts. Personally, I’d rather take the slower 1997 rate for Massachusetts given the two growth rates that preceded it. This new life in goods exports that occurred in 1997, along with the spurt in 1997 payroll employment growth discussed above, points to Rhode Island’s joining the "party" of rapid growth in 1997. Based on my Current Conditions Index, the strength began in the second half of the year.

When personal income growth rates for 1995 were released, we discovered that Rhode Island led the nation in per-capita income growth. To explain what was odd about this, you need to brush up on your algebra. In 1995, Rhode Island’s resident population fell (as it has been doing for several years now). The originally released per-capita income growth for Rhode Island was 6.6 percent for 1995. This figure is obtained by taking the difference between personal income growth and population growth. Since our population declined by 0.7 percent in 1995, this actually boosted our per-capita income growth: +5.9% income growth - (-0.7%) population growth. Of course, -(-0.7%) equals +0.7%, the increment added to per-capita growth via our declining population. The good news that year was that in spite of this technicality, total personal income for Rhode Island also grew faster than that for the nation as a whole.

The figure consistently reported in the media about Rhode Island’s budget surplus is $132 million. To the surprise of everyone I asked about this number, persons not professionally involved with knowledge of this value, the $132 million is a two-year total. Every one of these persons indicated that the media coverage of this inferred it was the value for a single fiscal year. That’s correct. The media should have referred to these as "surpluses." A surplus of $60-$70 million per year, while infinitely preferable to what we experienced just a few years ago, still raises questions about how we will be able to fund recently enacted consumption-oriented legislation such as the auto excise tax phaseout. According to a RIPEC study ("Property Taxes 1998"), the last year of this phaseout will cost the state $195.4 million. That’s almost three times our current annual budget surplus. Good luck!

As of August, 1998, Rhode Island’s manufacturing employment has declined by 45,600, or 37%, since it began its sustained decline in July of 1984. Unfortunately, to restore manufacturing employment to its previous peak, it will need to rise by 59%. This is a brainteaser. I’ll let you figure out the answer for yourself.

by Leonard Lardaro