Study: Manufacturing mix, housing bust doomed RI

Strength of RI recovery masked by depth of downturn, Fed researcher argues

PROVIDENCE, R.I. (WPRI) – Rhode Island lost more jobs than its New England neighbors during the recession mainly because of the types of manufacturers based here and the state’s larger bubble in housing prices, according to a new study published by the Federal Reserve Bank of Boston.

The study, completed in December by Fed senior economist Mary A. Burke, offers one of the closest looks yet at exactly what factors caused Rhode Island to get hit harder by the Great Recession than its neighboring states. Rhode Island’s unemployment rate soared from 4.9% in 2006 to 11.9% in 2009, and was still 6.8% as of December.

Burke emphasizes that while Rhode Island’s economy is frequently described as among the weakest in the nation, her research shows the state hasn’t recovered more slowly than its New England neighbors – it just has far more ground to make up than they do because it was hit so much harder by the original recession.

“Concerning the economic recovery, we observe that employment remains farther below its pre-recession peak in Rhode Island than in any other New England state because it fell farther during the recession, not because it grew more slowly than in the region’s other states during the recovery,” she writes in the paper.

Burke offers this graph to compare the scale of Rhode Island’s employment collapse to its neighbors:

Fed Burke RI study Exhibit 22b

While employment in Massachusetts is now even higher than its pre-recession peak, in Rhode Island only enough jobs have been added since the start of the recovery to replace 58% of the nearly 40,000 positions that were lost from 2007 through mid-2009.

Burke, a Brown University graduate, visited Rhode Island on Dec. 5 to discuss her findings with the state’s newly created nine-member Council of Economic Advisors. She suggested the state should focus on boosting the growth of the education and health sectors to keep up with its neighbors.

Contrary to popular belief, Burke writes, employment growth in Rhode Island hasn’t usually been the slowest in New England since late 2009. But with a larger percentage of its pre-recession jobs gone, the state would have needed to grow even faster to make up the ground it lost during the downturn.

As WPRI.com first reported in 2011, a groundbreaking paper published that year found that Providence-area workers faced more competition from the rise of China than those in any other U.S. region except one as of 1990. That was because Chinese factories began making the same types of products produced by manufacturers in Rhode Island.

“Rhode Island’s economy as of the 1990s and early 2000s was very highly concentrated in the kinds of labor-intensive manufacturing that proved susceptible to increasing competition from Chinese imports,” Burke writes.

Regions with that sort of manufacturing mix experienced larger manufacturing jobs losses even before the recession, Burke writes, and Rhode Island’s “steep manufacturing losses” during the recession “most likely contained a large structural component that was already in force prior to the recession.”

Another one of Burke’s findings: “Rhode Island had by far the highest pre-recession concentration of high-school dropouts in its manufacturing sector among the New England states,” and Rhode Island dropouts lost manufacturing jobs at nearly three times the rate their peers nationally did.

Although Burke offers no explanation for why that might have been the case, she suggests that “having a large share of poorly educated workers among those who were laid off in the manufacturing sector … may help to explain why Rhode Island experienced a larger peak unemployment rate during the recession than the other New England states.”

While Rhode Island’s largest job losses during the recession were concentrated in manufacturing and construction, it also lost a larger share of jobs than other New England states did in finance, government, and manufacturing, Burke finds.

“Had Rhode Island performed only as poorly in each of these latter three sectors as Connecticut, the second-worst-performing state in the region, virtually all of the difference between these two states … would have been erased,” she writes, referring to the percentage of jobs they lost during the downturn.

This chart from Burke’s paper shows how much each of 11 major economic sectors contributed to the overall drop in employment during the recession, in Rhode Island and elsewhere:

Fed Burke RI study Exhibit 7

The slow post-2009 jobs rebound in Rhode Island manufacturing and constructing goes “a long way toward explaining why Rhode Island’s employment level remains farthest below its pre-recession peak” among the New England states, Burke writes. She also finds that education and health employers have added jobs more slowly in Rhode Island than they have elsewhere in New England since 2009.

In addition, Burke finds that home prices fell further in Rhode Island than in any other New England state during the recession, which she suggests likely exacerbated job losses and hurt the financial industry, which includes real estate.

As an illustration of the size of the state’s housing bubble, Burke cites data showing the amount of mortgage debt per capita increased by 88.5% in Rhode Island between 2002 and 2006, the most in New England, though the increase in New Hampshire was nearly as large.

The debt-fueled increase in Rhode Island construction jobs in the early 2000s likely helped offset the ongoing loss of local manufacturing jobs over the same period, Burke writes, so once the recession hit and both types of jobs were being eliminated, it was harder for displaced workers to find a new job.

Additionally, Rhode Island saw slower growth in government spending and employment between 2005 and 2011, particularly during the recession years of 2008 and 2009, which Burke suggested may have further decreased overall demand in the state’s economy compared with the other New England states – particularly since government accounts for a larger share of Rhode Island’s state economy than in neighboring Massachusetts or Connecticut.

Ted Nesi (tnesi@wpri.com) covers politics and the economy for WPRI.com and writes the Nesi’s Notes blog. Follow him on Twitter: @tednesi

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