R.I.’s future: Improvement but weaknesses remain

First, the good news. Rhode Island’s economic outlook improved over the last year. The unemployment rate has dropped from a peak of 11.9 percent in March 2010 to 9.7 percent in December 2012 to 7.7 percent in August 2014. Between December 2012 and July 2014, the state added 9,700 jobs.
According to an index released by Bryant University and the Rhode Island Public Expenditure Council, the state’s economy expanded 3 percent in the second quarter of 2014, compared with growth of 2.2 percent in the first quarter. These accelerated growth rates compare with expansion of 1.4 percent in 2013, 1.3 percent in 2012, and contraction of 0.1 percent in 2011, according to the U.S. Bureau of Economic Analysis.
However, there are significant uncertainties and challenges facing the Ocean State. As of August 2014, just under 43,000 Rhode Islanders were unemployed and the state’s unemployment rate of 7.7 percent was the third highest in the nation. Rhode Island is also among the few states with total employment still below pre-recession levels. In addition, Rhode Island’s housing market and construction industry are still subject to significant volatility, thus making it difficult and risky for both individuals and developers to engage in transactions and make decisions related to housing in the state.
The fall 2014 New England Economic Partnership forecast for the state assumes no major changes to its underlying structure, including regulations and the tax structure. As a result, the report shows that the state economy is still operating with “brakes on” and that the pace of growth will continue to be slow, particularly in key industries, including manufacturing, construction, information, financial services, and trade, transportation and utilities.
Policymakers need to recognize that the state’s poor economic performance is not something new that started with the 2008 Great Recession. Between 1991 and 2000, Rhode Island was among the worst- performing states in the nation in terms of job creation, experiencing slightly more than 8 percent total employment growth. The pre-recession period in the 2000s was no different: The state added just more than 22,000 jobs between 2000 and 2007.
Rhode Island has structural problems and a cost-structure that is misaligned with that of competing states, which has sent away businesses and people who would contribute to create jobs and income in the state. The November elections provide a unique opportunity for the state to consider and take on measures that can accomplish that.
The list of issues to address includes several key items. The state (including cities and towns) has to create a tax system that aligns sales taxes, corporate taxes, unemployment insurance and local property taxes with that of competing states, thus making the state tax-competitive. However, potential loss of revenue implies that a major revamp of the tax structure can only be accomplished by taking bold steps to improve service quality and cut costs of public services in Rhode Island. Moreover, efforts already on course to improve the ease of doing business in the state must be quickly expanded, so that the state creates a uniform, predictable, efficient and simplified regulatory environment. Forecast highlights
The state unemployment rate declined faster than previous estimates and is expected to continue shrinking until it reaches 5.3 percent by 2018. The number of nonfarm jobs based in Rhode Island also has increased faster than previous estimates, but will continue to be below pre-recession levels until 2017.
From 2013 to 2018, Rhode Island’s growth of the Real Gross State Product is forecast to increase on average by 1.9 percent, higher than the average 0.9 percent observed between 2008 and 2013, but slower than the forecast of an average 2.4 percent growth for the New England region and 2.7 percent growth for the U.S. economy during the same period.
Per capita income is expected to increase to $48,287 in 2014 from $47,039 in 2013, an increase of 2.7 percent, although the annual growth rate from 2013 to 2018, when taking inflation into account, is forecast to average 1.3 percent in Rhode Island, compared with 2.4 percent in New England.
Total nonfarm employment is forecast to be 479,400 by the end of 2014 compared with 471,200 in 2013. By 2018, it is expected to reach 498,300. The resulting annual growth rate of employment is forecast to be 1.1 percent from 2013 to 2018, compared with a 0.4 percent decline from 2008 to 2013. In New England, total employment is expected to increase by 1.2 percent per year from 2013 to 2018.
The median price of a home is forecast to increase to $228,100 in 2014, a 2.1 percent increase from 2013. From 2013 to 2018, the median price is expected to rise at an average of 2.8 percent, compared with a decline of 1.7 percent between 2008 and 2013. By 2018, the median price of a house will be $256,500 in Rhode Island. A deeper dive
Despite lagging the country in job growth, by 2018 Rhode Island is expected to see its unemployment rate roughly match the national figures, at 5.3 percent, compared with the forecast national rate of 5.1 percent.
Driving employment growth will be the leisure and hospitality industry, and the professional and business-services sector, with annualized growth rates from 2013 to 2018 of 2.7 percent and 2 percent, respectively. Showing less-rapid growth but employing the most people is the education and health- services sector – one-quarter of private employment in the Ocean State – with a forecast increase of employment of 0.6 percent per year from 2013 to 2018. The high-tech sector – which includes high-tech manufacturing and tech services – is smaller, but is rebounding, with an expected growth rate of 1.4 percent per year.
Dragging the state’s job growth are: manufacturing; construction; information; financial services; and trade, transportation and utilities, all still below pre-recession levels at present. Thus, even with expected growth in the forecast years, they are not helping the state much.
For instance, manufacturing (not including high-tech manufacturing) will increase from recessionary lows to 42,000 by 2018. But that is still less than the 51,600 employed in the sector in the first quarter of 2007. Similarly, construction employment is forecast to reach 18,000 by 2018, less than its 2007 first-quarter level of 23,000. The information sector is expected to employ 9,000 workers in 2018, compared with 10,600 in 2007. Trade, transportation and utilities employment is projected to be 75,600 in 2018, compared with 79,800 in 2007. Only financial services is expected to reach its pre-recession level of 34,900 by the beginning of 2017. •


Edinaldo Tebaldi is an associate professor of economics at Bryant University. This piece is adapted from a presentation he gave at the New England Economic Partnership’s October 2014 economic-outlook conference.

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