Fiscal discipline and exports are key to R.I.’s health

Edward M. Mazze and Edinaldo Tebaldi

05/21/2011

Economic contraction has ended in Rhode Island, but there is not much for job seekers and the average Rhode Islander to celebrate. All macroeconomic indicators suggest that the path to economic recovery will be bumpy. They also indicate that major structural adjustments to Rhode Island’s economic foundations will have to be made if the state is to experience the same employment growth rates seen in the late 1980s and 1990s.
For instance, despite major cuts in government expenditures at the state and local levels in the last three fiscal years, Rhode Island is faced with a state budget deficit of more than $300 million for fiscal 2012 and a political deadlock on how to close this budget gap and avoid future structural budget gaps.
There are some highlights, so to speak:
• Rhode Island’s Real Gross State Product is forecast to reach $45.9 billion in 2011, an increase of 2.1 percent compared with 2010’s real GSP (measured in 2005 dollars). The annual growth rate of gross state product is forecast to be 2.3 percent from 2010 to 2015 as compared with 0.3 percent from 2005 to 2010.
• Per capita income is expected to increase to $43,742 in 2011 from $42,304 in 2010, an increase of 3.4 percent. In 2010, Rhode Island had the 16th-highest median household income by state in the United States and the 13th-lowest percentage of the population below the poverty level.
• The median price of a home was $216,300 in 2010 and is expected to be $208,900 in 2011, a decline of 3.4 percent, although the 2010 to 2015 period is forecast to see an average annual gain of 1.4 percent, putting the median price of a home in Rhode Island at $232,100, compared with $280,700 in 2005.
• The next five years are also expected to get home-building back on track, with the annual growth rate in housing permits of 11.3 percent, compared with an annual decline of 19.4 percent from 2005 to 2010.
• Bankruptcies are expected to grow from 5,200 in 2010 to 5,800 in 2011, an increase of 11 percent, and are forecast to level off at 5,300 per year through 2015, a higher number than before the Great Recession.
Overall, the Rhode Island labor market is slowly recovering from a trough at the end of 2009, and as a result the unemployment rate is expected to remain elevated over the next few years.
Total nonfarm employment in Rhode Island was just under 459,000 in the first quarter of 2011, compared with 495,500 in the 2007 first quarter. The number of jobs based in Rhode Island is expected to grow to 464,400 by the end of 2011. From 2010 to 2015, job growth in the state is expected to average 1.4 percent, a figure that will trail employment growth in the rest of the nation, putting the job total by 2015 at 490,900. Put another way, the average unemployment rate is expected to be 10.9 percent in 2011 and drop to 10.4 percent in 2012, and be 7.4 percent by 2015. Rhode Island’s jobless rate was the highest in New England in 2010 and 2011 and among the five highest in the United States, a distinction it will retain from 2011 to 2015.
The job growth that does occur will not be across the board. In 2011, for instance, two job categories – construction and government – out of 11 are expected to experience declines, while eight will grow, and one, manufacturing, will hold constant.
• Leading the way will be employment in the high-tech sector, which has held steady at just over 22,000 jobs since 2004. From 2010 to 2015, however, it will experience an annual growth rate of 3.2 percent, greater than the 2.2 percent expected in New England.
• The second-highest growth rate will come from professional and business services, which are forecast to add 500 jobs in 2011, with another 800 jobs expected to come online in 2012. Overall, in the 2010-to-2015 period, the sector will grow at a 2.7 percent annual rate.
• Leisure and hospitality is expected to add 1,300 jobs in 2011 and 1,200 more jobs in 2012. The average growth rate of employment in leisure and hospitality services is forecast to be 2.3 percent between 2010 and 2015, which implies that more than 6,000 jobs are expected to be created in these sectors over the next five years.
• Financial services will add few jobs in 2011, but is expected to start growing by mid-2012. From 2010 to 2015, employment is financial services is expected to grow 1.9 percent in Rhode Island, compared with 0.9 percent across New England.
• Education and health services, the largest industry in Rhode Island, employed 102,000 workers in 2011’s first quarter compared with 99,000 workers in early 2007, but it is expected to lag New England in terms of growth from 2010 to 2015, with an increase of 1.4 percent annually compared with 2.2 percent across the region. The immediate problem faced by Rhode Island is the lack of revenue to balance the state’s budget deficit, which has resulted in damaging layoffs and reductions in services on the local level as well.
The solution is to downsize and redesign government by identifying areas in government that can be made more efficient and less costly, reorganize agencies and departments and change the public compensation/pension systems. At the same time, the solution must include an economic-development strategy that will retain and attract businesses that create jobs and tax revenue by taking advantage of the state’s strategic assets, including its location and transportation facilities, one of a few states with all modes of transportation – surface by truck and rail, sea and air – available.
Increasing the exporting of products must be part of this strategy. Rhode Island exports grew from $1.65 billion in 2007 to $1.95 billion in 2010, an 18 percent increase. Rhode Island’s largest market – Canada – received more than $586 million in goods in 2010, accounting for more than 30 percent of the state’s total merchandise exports.
Jobs created through exporting account for 3.6 percent of Rhode Island’s total private-sector employment, although about one-sixth of all manufacturing jobs in the state depend on exports.
Rhode Island has more than 95,000 businesses, including 2,800 manufacturers, as well as more than 1,000 farms. Many of these businesses are interested in growth and are looking for opportunities within the state and region. Any strategy for making the Rhode Island economy stronger must include looking at international markets. •

Edward M. Mazze is the distinguished university professor of business administration at the University of Rhode Island. Edinaldo Tebaldi is an assistant professor of economics at Bryant University. This piece is adapted from a presentation they gave at the New England Economic Partnership’s May 2011 economic-outlook conference.

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