Mass economy expands at the fastest pace on record in Q3, UMass journal reports
State employment remains 10 percent below February peak; Q3 growth driven largely by federal aid
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In the third quarter of 2020, Massachusetts real gross domestic product (GDP) increased at a 37.7 percent annualized rate of growth, according to MassBenchmarks, while U.S. GDP grew at a 33.1 percent rate according to the U.S. Bureau of Economic Analysis (BEA). According to the BEA, in the second quarter, Massachusetts GDP decreased at a 31.6 percent rate while the U.S. GDP declined at a 31.4 percent rate. While the annualized growth rate in Q3 exceeded the rate of decline in Q2, we estimate that in Q3, gross state product in Massachusetts remained 2.6 percent below its 2019Q4 peak through September.
The record pace of growth in output in the third quarter following the record fall in output in the second quarter reflects the impact of the widespread shutdown of the state economy in the Spring, followed by its phased reopening during the Summer months. Economic activity in Massachusetts peaked in February and hit bottom in April. Economic growth surged in May and through July. While growth continued in August and September, the pace of growth has slowed in recent months. The pattern in Massachusetts and nationally was similar. However, Massachusetts' decline was initially steeper due to a more comprehensive shutdown that was imposed earlier and relaxed more slowly than other states and regions.
In the third quarter, Massachusetts payroll employment grew at a 29.5 percent annual rate after falling at a 51.2 percent annual rate in the second quarter. Nationally, job growth expanded by a 22.9 percent annualized rate in the third quarter following a decline at a 40.0 percent rate in the second quarter. Although job growth in the Commonwealth during Q3 was more robust than nationwide, Massachusetts remains further below its pre-pandemic peak than the nation. Since February (and through September) Massachusetts is 10.0 percent below its peak compared to 7.0 percent nationally.
MassBenchmarks estimates that Massachusetts' wage and salary income grew at a 13.6 percent annual rate in the third quarter, compared to 20.0 percent nationally. In the second quarter, the BEA estimates that wage and salary income declined at a 24.9 percent rate in Massachusetts and at a 25.7 percent annual rate nationwide. Year over year (Q3 2019 – Q3 2020), wage and salary income declined 1.8 percent in Massachusetts and 0.6 percent in the U.S.
"Aggregate payroll incomes in the third quarter were down less than employment because job losses – although widespread – have been concentrated in lower-paying sectors, especially in leisure, hospitality and other services," noted Alan Clayton-Matthews, MassBenchmarks Senior Contributing Editor and Professor Emeritus of Economics and Public Policy at Northeastern University, who compiles and analyzes the Current and Leading Indexes. "These sectors include entertainment, hotels, restaurants, barbershops, gyms, and other personal services that require close personal contact or travel," Clayton-Matthews added.
During the third quarter, unemployment rates fell sharply, though they remain higher in Massachusetts than nationally and still much higher than before the pandemic. The unemployment rate in Massachusetts in September was 9.6 percent as compared to 7.9 percent for the U.S. At its peak during the Great Recession, the Massachusetts unemployment rate was 8.8 percent. In June, the unemployment rate stood at 17.7 percent for Massachusetts and 11.1 percent for the U.S. In stark contrast, in September 2019, the unemployment rate was 2.8 percent in Massachusetts and 3.5 percent in the U.S. The most recent U-6 unemployment rate – which includes persons working part-time but who want full-time work and persons who want work but have not looked for work in the last four weeks – was 13.7 percent in Massachusetts and 12.8 percent in the U.S. in September, well below June levels of 21.2 percent in Massachusetts and 18.0 percent nationally.
The strong growth in the third quarter was aided largely by federal fiscal and monetary policy, especially the CARES act, which offered generous income supports through sizable enhancements to unemployment insurance income and grants and loans to businesses to remain open and reemploy workers. By keeping financial markets functioning and interest rates low, monetary policy has supported business liquidity and household wealth. Nationally, spending on goods (but not services) has rebounded and surpassed pre-pandemic levels. In Massachusetts, spending on items subject to the state's regular sales or automobile sales taxes rebounded sharply in the third quarter, growing at an 86.0 percent annual rate after falling at a 37.9 percent annual rate in the second quarter. Spending on these taxable items in the third quarter was up 7.0 percent year over year.
Fourth quarter growth is expected to slow sharply from the third quarter, reflecting the waning influence of the fiscal support from the CARES Act. The Wall Street Journal survey of economists' average expectation for fourth-quarter U.S. GDP growth was 3.8 percent in their October survey. Recently, monthly job growth rates have been decelerating. U.S. industrial production stalled in August and September. In Massachusetts, the MassBenchmarks Current Economic Index slowed substantially in September, reflecting slower growth rates in employment, withholding, and sales taxes. Initial unemployment claims remain stubbornly elevated and rose in Massachusetts during September. While continuing claims in the regular unemployment program continue to fall both in Massachusetts and the U.S., Pandemic Emergency Unemployment Compensation (PEUC) claims for people who have exhausted regular claims are rising steadily as long-term unemployment increases. Increasing rates of COVID-19 infections, both locally and across the U.S. and world, may further slow the pace of reopening during this Fall and Winter. For the remainder of the year, the uncertainty in the economic outlook is decidedly weighted towards the downside.