Published 06/22/11

The Current Conditions Index: A New Prescription for Diagnosing the State's Economic Woes

June 2011

As the German-Austrian statesman von Metternich said famously, when France has a cold, all Europe sneezes. The statement could easily apply to Rhode Island, tethered as it is to the New England economy. When the economy in Connecticut and Massachusetts sneezes, Rhode Island gets a bad case of the flu.

Until recently, however, none of the indexes used by Rhode Island policymakers to predict recessions took the economic activity of neighboring states into consideration. That created a blind spot in Rhode Island, a kind of economic bellwether that is the first state to suffer when the economy hits the skids.

“We felt that there were indicators here in Rhode Island, developed by a variety of people, that just didn’t have a full measure of what we were looking for,” says John Simmons, executive director of the Rhode Island Public Expenditure Council. “We wanted to have a national, a regional and a state outlook. We wanted to understand the relationships between the three. And we wanted them to be predictive of where the economy would go.”

So RIPEC, a business-backed group that tries to influence public policy, joined forces with the just-launched Center for Regional and Global Economic Development at Bryant University to produce a new index for predicting the direction the state’s economy would take.

Dubbed “The Current Economic Indicator,” the new index combines a medley of data into a single figure intended to forecast economy activity as far as six months ahead.

An unconventional approach

The Current Economic Indicator was devised by assistant economics professors Edinaldo Tebaldi, and Logan Kelly, now director of the Center for Economic Research at the University of Wisconsin.

Using a proven, but – for Rhode Island – unconventional approach, Tebaldi and Kelly left out such traditional measures as unemployment. Why? Because at best the unemployment rate is at a lagging indicator of economic activity, according to Tebaldi. At worst, it’s misleading, “because unemployment may change, it may drop, just because people gave up looking for jobs.”

They also left out housing permits. “We tried housing permits as a predictor,” Tebaldi says, “and we didn’t find much coming from it. But we did find a robust relationship between employment in construction” and the Ocean State economy. Employment in the hospitality industry, trade, transportation and utilities, and professional and business services were found to be good measures of economic activity, too.

Tebaldi and Kelly left out jobs in manufacturing, because they account for a shrinking percentage of the state’s overall employment, says Tebaldi, who, along with Edward M. Mazze, distinguished professor of business administration at the University of Rhode Island, works as co-forecast manager for Rhode Island at the New England Economic Partnership.

Leonard Lardaro, professor of economics at URI, has no problem with omission of manufacturing jobs from the new index, even though an upsurge in manufacturing appears to be leading the state’s economic recovery.

Lardaro’s monthly index of economic activity measures manufacturing activity, rather than manufacturing employment. In the mid-1990s, when he first published it, “people were essentially looking at manufacturing employment and trying to gauge what’s going on, which is really ridiculous,” he says, “because of productivity enhancements” eliminating jobs.

The key ingredients in the new Current Economic Indicator, the components that distinguish it from other indexes, are regional economic activity and national economic conditions. The hope is that both factors will reflect the impact on Rhode Island of economic activity in the nation and neighboring states.

The new index, issued quarterly, came out for the first time in March with a report showing that economic activity in Rhode Island increased a paltry 1.4 percent during the Fourth Quarter of 2010.

The second index came out in May and reported that the state's economic expansion is holding, though the labor market has yet to rebound in the First Quarter of 2011.