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A program of the Economic and Public Policy Research Group at the UMass Donahue Institute
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Current and Leading Indexes

State growth in Q3 fueled by an unexpected surge in the state labor force, UMass journal reports

Current Index: Up 3.3% Leading Index: Up 2.1%In the third quarter of 2018, real gross domestic product in Massachusetts grew at an estimated 3.3 annualized rate according to the MassBenchmarks Current Economic Index, released today by MassBenchmarks, the journal of the Massachusetts economy published by the UMass Donahue Institute in collaboration with the Federal Reserve Bank of Boston. Nationally, real gross domestic product grew at a 3.5 percent annualized rate during the same period according to the advance estimate of the U.S. Bureau of Economic Analysis (BEA). Based on the latest available data, we now estimate that in the second quarter, Massachusetts real gross domestic product expanded at a 5.9 percent rate while U.S. GDP grew at a 4.2 percent rate. For the first quarter of this year, the BEA estimates that real GDP grew at a 1.5 annualized percent in Massachusetts and at a 2.2 percent rate nationally.

The Massachusetts and U.S. economies grew at very similar rates in the third quarter, both at a notably slower pace than the prior quarter, yet faster than the average annual growth in 2017. In 2017, the Massachusetts economy grew 2.6 percent while the U.S. grew 2.2 percent. Taken at face value, it appears that the state had very strong job growth and falling wage and salary income during the third quarter, but this interpretation lacks important context. Massachusetts payroll employment levels grew at an estimated 2.4 percent annual rate in the third quarter, led by a reported surge in job creation in June, when an estimated 21,600 jobs were created. Only 2,100 net new jobs were added between June and September, with employment reportedly declining by an estimated 6,200 in September, due to a loss of 9,100 jobs in leisure and hospitality. Does this mean that job growth has actually slowed substantially? Not necessarily, because the survey results for leisure and hospitality are especially prone to sampling error. The truth about job growth probably lies between the strength suggested by the quarterly growth and the weakness of the last few months. The wide divergence in the amount and pace of job growth in June and September may reflect as much statistical noise and sampling error as underlying change in state labor market conditions.

While Massachusetts wage and salary income as estimated from withholding taxes declined at a 10.6 percent annualized rate in the third quarter, the same withholding tax measure for the second quarter grew at a 19.1 percent annual rate. Taken together, this implies an average quarterly growth rate of about 3.2 percent in the second and third quarters. This quarterly average likely better reflects the true rate of wage and salary growth experienced over the past six months. Although smoothed withholding tax revenues provide a reliable signal of wage and salary income, at the monthly and even quarterly frequency they can be prone to volatility due to the timing of tax collections. The BEA's estimate of Massachusetts wage and salary income can also be volatile. In the second quarter, the BEA estimated wage and salary income growth of only 1.1 percent, as compared to a reported growth rate of 12.2 percent in the first quarter of 2018.

Note: The MassBenchmarks Current Economic Index is calculated using statistical techniques designed to smooth sampling errors and filter out the statistical "noise" associated with official state income and employment estimates.

Unemployment rates for both Massachusetts and the nation remain low historically and well below pre-Great Recession levels. In September, the unemployment rate for Massachusetts was 3.6 percent as compared to 3.7 percent nationally. The Massachusetts rate has remained virtually unchanged since September 2017, while the U.S. rate has fallen by half a percentage point (from 4.2 percent to 3.7 percent since September 2017).

The state's unemployment rate has not fallen in step with the nation's due to strong labor force growth in Massachusetts, according to the Bureau of Labor Statistics' Current Population Survey. According to the BLS, the Massachusetts labor force grew at an annual rate of 8.0 percent in the third quarter and has grown by 3.9 percent since the third quarter of 2017. Resident employment grew at an estimated annual rate of 7.8 percent in the third quarter and was up 4.0 percent year over year (Q3 2017 to Q3 2018).

"The magnitudes of these labor force growth estimates are too large to be credible. However, they appear to point to unexpected underlying strength in the state labor force," noted Alan Clayton-Matthews, MassBenchmarks Senior Contributing Editor and Associate Professor of Economics and Public Policy at Northeastern University, who compiles and analyzes the Current Index. "It is difficult to reconcile the steady and strong job growth in some knowledge-based sectors such as professional, scientific, and technical services — which have grown 6.5 percent since September of last year — with state demographics unless one assumes that the Commonwealth is attracting skilled workers who are relocating or commuting from outside the state," Clayton Matthews added.

Consumer and business spending in Massachusetts, as measured by regular sales tax receipts and motor vehicle sales taxes, rose at an 11.0 percent annual rate in the third quarter, after growing at a 4.6 percent rate in the second quarter. This measure of spending has grown 7.6 percent since the third quarter of 2017.


MassBenchmarks is published by the University of Massachusetts Donahue Institute in cooperation with the Federal Reserve Bank of Boston. The Donahue Institute is the public service, outreach, and economic development unit of the University of Massachusetts Office of the President. The Current and Leading Indexes are compiled and analyzed by Dr. Alan Clayton-Matthews, Associate Professor of Economics and Public Policy at Northeastern University and are released quarterly by MassBenchmarks.


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