This report brings good and bad news to Rhode Islanders.
Rhode Island is working its way out of the recession, but new jobs will be hard to come by for awhile.
Rhode Island was among the first states to fall into recession and as a result, experienced a significant drop in economic activity from 2007 to 2009, causing unemployment to skyrocket.
From 2006 through 2010, for example, Rhode Island will have lost almost 40,000 jobs, a little less than 10 percent of the state’s total employment. The sectors losing the most jobs were manufacturing, construction, trade, transportation and utilities, financial services, and professional and business services.
The only sector gaining jobs during this same time period was education and health services. The high-tech sector, which was expected to move Rhode Island out of the manufacturing era, went from 23,100 jobs in 2006 to 22,200 jobs in 2010.
One result of this contraction has been the increased importance of the small-business sector to the health of Rhode Island. The state has more than 22,400 small establishments employing fewer than five workers. Just less than 50 percent of its private-sector employment comes from businesses with fewer than 50 employees.
But small businesses have been hit hard since 2007 by the recession, an unfriendly business environment, a noncompetitive tax structure, archaic business regulations, the inability to get credit and additional financing, and the recent floods.
And how has the state reacted to these challenges? Until recently, Rhode Island lacked a carefully defined economic-development plan. The big question remains: What can be done to retain and grow businesses (particularly small businesses) in Rhode Island?
Efforts are currently under way by the executive and legislative branches of government to better support economic development and simplify doing business in the state. However, the state also needs to continue to solve the deficit and pension problems once and for all. Rhode Island is insolvent when underfunded pensions and deficit spending are considered.
For the year ending June 30, 2010, the state needs to close an estimated $180 million deficit (revised from a previously estimated $220 million gap). A $362 million deficit has already been projected for the next fiscal year.
A deeper look
While a number of economic indicators imply that the state has reached the bottom of its recession, the recovery will not be shared equally by the state’s citizens.
For starters, the state’s real gross state product for 2010 is forecast to reach $39.9 billion, an increase of 4.9 percent over 2009. The annual growth rate of gross state product is forecast to be 3.8 percent from 2009 to 2014, compared with 0.1 percent from 2004 to 2009.
As a result, Rhode Island’s GSP growth is expected to be slightly higher than in New England and the nation in 2010. In 2010 GSP is expected to grow 3.5 percent in New England and 2.8 percent nationwide.
The forecast indicates that the job market is stabilizing, but few jobs are expected to be created in the short run. The state lost 39,600 jobs from the peak in 2006 through 2010. Total nonfarm employment in 2009 was 459,000 and is forecast to be 453,600 in 2010. But in 2011, 3,300 new jobs will be created. By 2014, Rhode Island’s total employment is expected to be 488,100, a number similar to 2004 but below the peak employment level of 493,200 in 2006.
Job creation during the economic recovery is expected to take place unevenly, with some sectors stagnant, particularly manufacturing – the sector that shed the largest number of jobs in Rhode Island since the beginning of the recession. Leisure and hospitality, professional and business services, trade, transportation and utilities, and education and health services are expected to lead job creation during the economic recovery.
As a result, while the unemployment rate reached 12.8 percent in 2010, in 2011, it is expected to be 11.7 percent and fall to 9.2 percent in 2012. A 7.1 percent unemployment rate is forecast for 2014.
Bankruptcies grew from 4,800 in 2009 to 6,600 in 2010, with the number of bankruptcies expected to peak at 8,400 in 2012. For the period 2009 through 2014, the average annual growth of bankruptcies in Rhode Island is forecast to be 6.5 percent.
Real personal income per capita, however, is expected to decrease 0.2 percent in 2010, compared with a decrease of 0.8 percent in 2009. Real personal income per capita is forecast to grow, on average, 2.9 percent from 2009 to 2014.
Small business’
role in recovery
Small businesses are a major economic driver in Rhode Island. Firms employing fewer than 20 employees account for 30 percent of the private jobs in Rhode Island. Altogether, establishments employing fewer than 249 employees account for 85 percent of private employment in Rhode Island, a growing number thanks to the economic transformations of the last decade.
In 2001, businesses employing fewer than 50 employees accounted for 46.1 percent of the private employment in Rhode Island, compared with 45 percent in the New England area. In 2009, businesses employing fewer than 50 employees accounted for 48.8 percent of the private employment in Rhode Island, compared with 45.6 percent in the New England area.
At the same time, Rhode Island small businesses have been shedding jobs. From 2007 through 2009, 23,444 jobs vanished in businesses employing fewer than 250 employees, compared with a loss of 4,116 jobs in firms employing more than 500 employees.
It is obvious that the speed and force of the recovery in the state will be determined by the pace of small-business recovery. In some cases, a recession may spur small-business development because of the larger-than-usual supply of available labor.
Also, a recession is often the time when new businesses are created by individuals who are unable to find a job. This is referred to as “necessity entrepreneurship,” as compared to “opportunity entrepreneurship,” in which an individual takes advantage of an opportunity when currently employed.
Rhode Island’s poor economic performance over the last years and the future economic outlook indicate that the state is in serious economic difficulty. Certainly many jobs are unlikely to return, having moved overseas or gone as a result of structural changes. The only way for job growth to occur here is for small businesses to grow and for the state to attract new businesses.
The challenges to small businesses are well-known, but there are some advantages to doing business in Rhode Island. Many small businesses succeed because of accessibility to customers, suppliers and transportation facilities. However, removing the aforementioned barriers would allow small business to grow much faster.
At a March 2010 conference at Bryant University titled, “The Rhode Island Economy: What’s Next? Beyond the Problems to the Solutions,” recommendations were made and a road map for the growth of the economy was prepared. Among them:
• Become tax competitive, and adopt a uniform, predictable, efficient and simplified regulatory environment. Economic growth and increased state revenue will follow.
• Solve the state’s budget problems.
• Realign the state’s mindset to one of being part of the New England economy.
• Brand Rhode Island as an up-to-date economic environment and then market its competitive advantages.
• Make the service sector and high-tech activities the future of the economy.
• Focus resources on targeted areas and economic sectors such as the “green economy.”
There is general agreement that the state needs broad economic growth in order to create jobs, attract new businesses and reduce the budget deficit. To combat the lethargy that exists in economic development, leaders with realistic and coherent economic plans are required. •
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 Partnerships May 2010 economic outlook conference.
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