Rhode Island’s economy slipped into recession in 2008, well ahead of the rest of the country, and there is little evidence that it will escape from its clutches until the second half of 2009, according to the spring forecast for the New England Economic Partnership (NEEP).
The recession was caused by the tightening of credit due to the subprime mortgage meltdown, along with the accompanying bursting of the home-sale bubble. Looking ahead, those problems, in addition to other problems in the financial services sector, as well as the drop in confidence of consumers and businesses, job losses, the high number of mortgage foreclosures and a state budget deficit in fiscal 2009 of potentially more than $400 million all will prevent the economy from recovering.
While the list of the state’s woes is long, two very specific symptoms stand out going forward: job loss and declining housing sales and prices.
From March 2007 to March 2008, Rhode Island lost 10,200 jobs, which has cut the number of jobs created since the end of 2002, when Gov. Donald L. Carcieri took office, to 10,200. The unemployment rate at the end of April stood at a seasonally adjusted rate of 6.1 percent.
The median price of a home so far in 2008 is $247,700, and it is expected to decline to $244,100 in 2009. In addition, the number of homes sold is projected to fall to 8,700 in 2008 (from 12,100 in 2007) before rebounding to 10,400 in 2009.
Other highlights from the NEEP forecast:
• After losing jobs in 2008, Rhode Island will add 4,800 jobs in 2009, growth of about 1 percent, reaching a total of 495,100.
• Sectors that will supply job growth in 2009 are construction, information, professional and business services, education and health services, leisure and hospitality, and high tech.
• The population of the state is expected to fall by 2,000, to a total of 1.056 million by the end of 2008, but add back 1,000 in 2009.
• The age cohorts expected to grow in 2009 are 20 to 24 and 45 to 64.
• Gross State Product (GSP) will increase 3.0 percent in 2009 to $40.7 billion.
• Per-capita income is expected to climb 3.8 percent to $41,792 in 2009.
EMPLOYMENT
As in the most recent NEEP forecast (published in November), employment in Rhode Island over the next year is expected to grow at a rate greater than throughout New England, 1.0 percent versus 0.2 percent. For the 2007-12 period, average annual growth for the state is forecast to be 0.7 percent, compared with 0.6 percent for the 2002-07 period.
In the short term, the labor force is expected to grow 0.7 percent and reach 583,000 in 2009 (compared with 0.6 percent from 2008 to 2009 throughout New England). For 2007-12, the annual growth rate in the labor force in Rhode Island is estimated to be 0.4 percent, which is less than the rate for the time period 2002-07, which was 0.8 percent.
The unemployment rate for 2009 is forecast to be 6.0 percent, the same as it was in April for the Providence-Warwick-Fall River metro area. That contrasts to the 5.2 percent rate that is expected for all of New England for 2009.
The labor market continues to be dynamic, with manufacturing losing jobs going forward – an expected decrease of 0.3 percent from 2008 to 2009 – while construction will show growth in the period of 1.7 percent. That last figure is better than the projected 2.0-percent loss in construction jobs that are expected throughout New England by the end of next year.
Looking long-term, the leisure and hospitality sector is expected to grow 1.9 percent per year from 2007 to 2012, an increase from the 1.3-percent growth it saw from 2002 to 2007. With nearly 52,000 people employed in the business, leisure and hospitality represents almost one in nine private-sector employees in Rhode Island.
The next largest growth rate is expected in the education and health services sector, as it is expected to show a 1.7-percent rate for the 2007-12 period, compared with 2.4 percent for 2002-07.
High-tech jobs are expected to see an average increase of 1.1 percent from 2007 to 2012, a slowdown from the 1.8-percent annual growth rate for 2001-06.
Highlights from other sectors include no growth in the financial activities sector from 2007 to 2012, 1.2-percent growth for professional and business services looking forward, and 0.7-percent growth for the information sector in 2007-12.
HOUSING
Rhode Island’s housing market is going in reverse. For 2009, it is estimated that about a quarter of the homes in Rhode Island will have negative equity. A study by the Pew Foundation predicts that more than half of Rhode Island’s homeowners could lose in excess of $7,000 of their property value as home prices decline.
The devaluation in property could reduce the combined state and local tax base by $1.7 billion, which would have a significant effect on the budgets of cities and towns.
The median sale price of a home has been forecast to be $247,700 in 2008, although there are reports of lower median prices.
The annual growth rate of the median price of a house for 2007-12 is forecast to be 0.1 percent, compared with 7.9 percent for 2002-07. A contributing factor to this drop is an increase in housing inventory on the market, which grew 14.25 percent from February 2007 to last February
Rhode Island is not isolated in this problem. In the New England states, the median price of a house is forecast to be $276,800 in 2008 and is expected to drop 0.8 percent in 2009.
While single- and multi-family housing permits showed a steep drop to 1,034 in 2008 compared with 2,181 in 2007, they are forecast to rebound significantly to 1,800 in 2009, as lower interest rates spur new construction. The state’s rate is expected to outstrip that of the rest of New England, which should show a 45.6-percent increase in 2009.
RHODE ISLAND AT A CROSSROADS
The major political challenge of today – the state’s budget deficit – can at least be partially solved by a consolidation of government services at the local and state level. That presumably would give the state more flexibility in helping create more private-sector jobs, which is neither simple nor inexpensive. But in the long run, it is the most important way out of the state’s recession.
Small and mid-size businesses tend to be the source of most new jobs. Over time it has been found that firms with fewer than 20 employees create more than half of net new jobs. For that reason, it is important that the state support existing businesses with the potential to grow before creating programs to attract new companies to the state.
Some economists believe job-creation incentives are effective less than 10 percent of the time. For that reason, the first step the state should take is to assess whether the current programs it offers are effective.
There needs to be a Job Creation Summit in Rhode Island to bring together elected officials, economic-development leaders, officials from higher education and unions, and business leaders to examine the key issues that affect job creation and economic development and to propose programs for creating jobs.
One thing to consider is whether to use the state’s public-employee pension funds, with appropriate controls and accountability, to invest directly in Rhode Island businesses in the startup phase, when seed money is most critical, and in situations that contribute to community revitalization while achieving market returns. In all of these cases, no public or pension funds should be given to corporations unless there is accountability.
It is critical for Rhode Island to come out of the recession stronger, with more jobs being created so that the state does not continue to lose its most important asset … human resources. •
Edward M. Mazze is the distinguished university professor of business administration at the University of Rhode Island. This piece is adapted from his Rhode Island Economic Forecast, presented at the Federal Reserve Bank of Boston on May 30.
