THE WISH WAS THE FATHER OF THE THOUGHT

The Providence Business News, September, 1995

After analyzing the Rhode island economy throughout this entire recovery, which has meant observing exceptions to the traditional "rules" more often than I care to remember, I formulated a hypothesis about the way this recovery will end. Since this recovery has been so grudgingly slow, and overall activity has been, to put it kindly, "sustainable," it appeared that Rhode Island might now be in a position to alter its historical timing with the national economy as the day of reckoning gets closer.

My hypothesis, stated simply, is that the sheer sustainability of economic activity throughout this recovery would enable us to avoid entering a recession until several months after a national recession has begun. Three trends led me to formulate this hypothesis. First, and foremost, payroll employment has grown very little since this recovery began in January of 1992. After three and one-half years of recovery, seasonally-adjusted payroll employment has increased by only 16,700 through July, 1995, barely more than a 4 percent rise. Clearly, no major bottlenecks have developed over this period. Second, Rhode Island's manufacturing employment has been declining steadily since 1984. This highly cyclical element of our economy should thus pose less of a threat to the overall direction of our economy than it once did. Perhaps as important, we have now experienced the vast majority of the defense cutbacks that will occur through the remainder of this decade, a favorable "structural" economic trend. Finally, Rhode Island began its transition to a primarily service-based economy in late 1987, a change that makes our economy less cyclically-sensitive. Since December, 1991, manufacturing employment has fallen by over 10,000 (-10.2%), while service employment has risen by 15,400 (+12.6%).

Reality struck in May. National employment fell that month on a year-over-year basis, as a short-lived period of national weakness, the result of an inventory cycle, began. Since then, the national economy has regained its forward momentum. Rhode Island has not been so lucky. The Current Conditions Index (CCI) indicates a definite slowdown in the Rhode Island economy since April. After reaching 67 in April (out of 100), the CCI fell to 58 for both May and June, a value consistent with very little forward momentum. In July, the CCI fell to 33, which indicates a contraction in the Rhode Island economy. Thus, when the national economy faltered, Rhode Island followed suit, which provides rather conclusive evidence against my hypothesis. Even more disturbing, though, Rhode Island's payroll employment continued to contract (year-over-year) well after national economic growth resumed.

Where did the hypothesis go wrong? While the size of Rhode Island's manufacturing sector has diminished, durable goods manufacturing, which is highly sensitive to business cycles, continues to be substantially larger than non-durables manufacturing. And, to a lesser extent, there has been accumulating evidence of scattered skill shortages, a finding recently confirmed by a Smaller Business Association of New England poll. But, since April, the pattern of economic activity in Rhode Island has made it "cyclically vulnerable." Since April, the primary "engines of growth" for Rhode Island have been retail trade, which is very cyclical, and local government employment, which is sensitive to fiscal pressures. Service employment growth has slowed to a crawl of late. Some short-term gains in both the manufacturing and housing sectors appeared earlier this year, but the recent national weakness caused a nosedive in manufacturing man-hours and substantial declines in single-unit building permits. In fact, seasonally-adjusted single-unit building permits for July, 1995 were below their value at the trough of the last business cycle!

As an optimist about Rhode Island, I had hoped that there might be some potentially good news in what has been a very disappointing performance throughout this recovery. Unfortunately, a viable hypothesis proved to be false. As J. Edgar Hoover used to say: "... the wish was the father of the thought."

by Leonard Lardaro