(Editor’s Note: This piece is adapted from the Fall 2009 New England Economic Partnership forecast, delivered Nov. 10 at the Federal Reserve Bank of Boston.)
Color Code Red for Rhode Island’s economy in 2009 and 2010. Virtually every economic indicator reports that the state’s economy is in serious trouble.
The unemployment rate, at 13 percent, is more than 3 percent higher than the average rate of states in the union. It is the highest rate since official recordkeeping began in 1976 using U.S. Bureau of Labor Statistics methodology.
At the end of September, there were 74,000 unemployed Rhode Islanders, with 17,760 unemployed for a year or more. There were 3,100 unemployed Rhode Islanders who had exhausted unemployment benefits.
Almost every employment sector in the economy had fewer jobs in September 2009, except for government employment. From September 2008 to September 2009, education was the only employment sector to add jobs, while employment in natural resources and mining remained unchanged. Manufacturing lost 5,400 jobs, professional and business services lost 3,500 jobs, construction lost 3,200 jobs and retail trade lost 2,900 jobs.
Slightly more than 800 building permits will be issued in 2009, which represents about one-third of the historical averages during the 1990s and early 2000s.
At the same time, the rate of home sales is lower than that observed in the late 1990s.
Some estimates suggest that the state’s budget deficit will be well over $200 million for fiscal year 2010. At the local level, Rhode Island’s cities and towns are having a difficult time balancing their budgets because of a lack of state support and tax revenue.
With the increasing state budget deficit, no new sources of revenue in sight and little economic development, the state’s economy will likely be unable to grow. Small businesses that have been in existence for decades are going out of business and hundreds of thousands of square feet of retail space and commercial property are vacant.
As if the cold, hard facts weren’t enough of a slap in the face, the state has a serious branding problem. Rhode Island appears at the top of national lists dealing with business unfriendliness, poor tax competitiveness, high per capita state budget deficits, bankruptcies, foreclosures and unemployment rate.
Under this context, the economic outlook for Rhode Island over the next few years is somewhat dismal. The New England Economic Partnership (NEEP) Fall 2009 forecast significantly revised the Rhode Island figures presented in the Spring 2009 conference, which were too optimistic in forecasting unemployment rates and other key economic indicators.
The state’s real gross domestic product (GDP) for 2009 is forecast to drop 1.5 percent to $37.6 billion, $200 million less than the GDP observed in 2004 and nearly $600 million less than last year. For 2010, the GDP forecast is $39 billion, an increase of 3.6 percent over 2009, while the annual growth rate of GDP is expected to be 3.4 percent from 2008 through 2013, greater than the New England average.
However, GDP growth expected for 2010 and 2011 will not affect the labor market. Employment will continue to decline in 2009 and 2010 from a high in 2006. The state will lose just more than 40,000 jobs from the peak in 2006 through 2010, 9,000 of those jobs disappearing from now until the third quarter of 2010. Job growth is only expected in 2011, when 5,300 new jobs will be created. By 2013, Rhode Island’s total employment is expected to be 484,100, a number similar to 2003 and below the peak employment level (495,800) at the end of 2006.
The unemployment rate is forecast to reach 13.5 percent by the end of 2009 and peak at 14.1 percent by the second quarter of 2010. In 2011, the unemployment rate is expected to be 12.4 percent on average and drop to 10.1 percent in 2012. An 8.8 percent rate is forecast for 2013.
The economic transformation of the recession has caused significant changes in the employment mix in the state. For instance, while manufacturing accounted for 10.7 percent of the state’s jobs in 2006, it will drop to 9.1 percent by 2010. Other sectors that will decline: professional and business services, 10.9 percent in 2010 from 11.4 percent in 2006; construction, 3.9 percent in 2010 from 4.6 percent.
On the other hand, education and health care employment will grow as a share of the state’s jobs to 21.9 percent in 2010 from 19.7 percent in 2006. And government will increase its share 0.9 percent to 14.1 percent.
The median price of homes was expected to decline in 2009 to $201,400 from $246,200 in 2008, and it is expected to fall to $181,600 in 2010, a level not reached since 2002. And although median prices of homes are expected to increase from 2011 through 2013, it will hover at about $200,000 at the end of this period.
Housing sales are expected to increase in 2009 over 2008 by 100 homes to 9,700, as the affordability index – the ratio of median house price to median household income – declines further, bringing home-affordability levels to those last experienced in 2001. The current sales level amounts to a 6.9-month supply of homes, which is normal for Rhode Island.
In 2010, 600 more homes will be sold for a forecast total of 10,300 sales.
Bankruptcies are forecast to grow from 5,200 in 2009 to 7,200 in 2010, peaking at 8,500 in 2011. For the period 2008 through 2013, the average annual growth of bankruptcies in Rhode Island is forecast to be 15.1 percent, compared with 14.8 percent in New England.
The reduction in credit access caused by bankruptcies affects the economy as a whole, as households that go bankrupt usually lose their capacity to take advantage of credit services and are forced to cut consumption. They also might be unable to start new businesses due to a lack of financial resources and credit.
Personal income is expected to be $43.6 billion in 2009, increasing to $43.9 billion in 2010. Per capita income is expected to increase to $41,520 in 2009 from $41,226 in 2008, which represents an increase of 0.7 percent. In 2010, per capita income is forecast at $41,850, a 0.8 percent increase over the 2009 figure.
When adjusted for inflation, however, real personal and disposable income is expected to remain flat.
The challenges ahead
The economy is showing some signs that the recession may be bottoming out, as job losses slow down and employment agencies that provide part-time employees are receiving more calls for assistance.
But as positive as that news may be (and it is no sure thing that temporary employees will become permanent), Rhode Island cannot avoid that it must create jobs, a lot of jobs. The question is: where will the jobs come from?
Even considering that some jobs will be created in the energy and green-products sectors and that the federal stimulus program will also create some jobs, the forecast suggests that less than 30 percent of the lost jobs during the recession will return by 2012.
And trying to revive defunct industries will not promote sustainable employment and income growth. Therefore, the state needs to identify sectors with comparative advantage and potential for job and income creation and then make significant efforts to attract these industries to Rhode Island.
Rhode Island’s jobs in the future will come from the health care, leisure and hospitality, professional and business services, and information sectors, and from manufacturing of medical equipment and defense electronics, cell phone applications, biotechnology, Internet routing equipment, cyber security, satellites and new sources of energy. These are high-wage industries with long-term growth potential.
The state needs to support small businesses. A Small Business Stimulus Program which included an infusion of capital into the state-backed Small Business Loan Fund and a Small Business Guaranty Program proposed by the governor was not included in the 2010 budget approved by the legislature.
Support for expanding market access and exports is also needed. The state ranked 50th in export growth between 2001 and 2005, with no growth at all. Between 2005 and 2008 the state improved its performance in exports, but export growth has been consistently below the national average. The state has about 3.8 percent of its work force linked to producing goods for exports, compared with a national average of 5.1 percent.
To compete for new jobs, new businesses and new markets the state needs to lower the costs of doing business, have a well-trained labor force, change the regulatory environment, deal with affordable housing and revise the tax system.
Government at the state, city and town levels must act fiscally responsibly. The time has come to change the public employees’ pension system, restructure economic development in the state, get rid of some state agencies by combining activities, and consolidate city and town education, public safety and public works functions.
Those considering the reorganization of the government must also consider market-driven solutions to provide public services. By continuing to do nothing, new businesses will not come to Rhode Island, new jobs will not be created and taxes will eventually have to be increased to support government services. For the state to be competitive in attracting and retaining businesses, changes in the regulatory and tax systems will have to be made and the unfriendly business climate has to change.
The creation of jobs and solving the state’s budget deficit problem once and for all are the major economic issues Rhode Island faces as it enters 2010. •
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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. Additional information is available at www.neepecon.org.
