State economic growth moderates in Q3, UMass journal reports
Fundamentals remain strong following torrid pace of growth in Q2.
Massachusetts real gross domestic product grew at an estimated annual rate of 2.0 percent, in the third quarter of 2015 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. U.S. real gross domestic product grew at an annual rate of 1.5 percent according to the advance estimate of the U.S. Bureau of Economic Analysis. Based on the latest available information, we now estimate that Massachusetts expanded at a 7.1 percent annualized rate in the second quarter while the nation grew at a 3.9 percent rate. In the first quarter of 2015, the Massachusetts economy grew at a 3.2 percent rate as compared to 0.6 percent for the U.S.
The pace of the state's economic growth moderated significantly in the third quarter following an exceptionally strong second quarter. The rate of growth in the U.S. economy also slowed in the third quarter. Much of the decline in the pace of growth was due to slower productivity growth rather than a weakening in the fundamental underlying strength of the regional economy. Although Massachusetts payroll employment fell by an estimated 7,100 jobs in September, the state job market remains strong. Over the entire third quarter, the state's payroll employment grew at a 2.2 percent annual rate, down from 3.0 percent in the second quarter. In contrast, U.S. payroll employment grew at a 1.7 annual rate in the third quarter, the same pace as in the second quarter.
The state's unemployment rate dropped one notch from 4.7 percent in June to 4.6 percent in September, while the U.S. unemployment rate fell from 5.3 percent to 5.1 percent during the same period. "In the third quarter, the number of initial unemployment claims in the state continued to trend downward," 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 and Leading Indexes. "In September, on a seasonally-adjusted basis, the number of new unemployment claims in the state was the lowest on record — which dates back to January, 1973," Clayton-Matthews added.
Based on withholding tax revenues, Massachusetts wage and salary income growth increased significantly in the third quarter, growing at an estimated 7.3 percent annual rate. This follows growth of 4.1 percent in the second quarter. On a year-over-year basis, Massachusetts wage and salary income in the third quarter was up 5.8 percent. Nationally, wage and salary income is on track to grow at a 5.0 percent annualized rate in the third quarter, double the 2.5 percent rate experienced in the second quarter.
Consumer and business spending, as measured by spending on items subject to the state regular sales tax and the motor vehicle sales tax, declined in the third quarter at a 3.4 percent annual rate. However, this does not appear to reflect strained household budgets or weak consumer confidence, but rather a return to reality following an unsustainable 15.8 percent annualized rate of growth in the second quarter. Notably, this measure of state consumer spending was 4.9 percent higher in the third quarter of 2015 than it was in the third quarter of 2014.
The MassBenchmarks Leading Economic Index suggests that the state's solid economic performance will continue through the rest of the year and into the next. It is projecting real state gross product growth will rise to 3.6 percent in the fourth quarter of this year and the first quarter of next year. But considerable global downside risks persist. A sluggish European economy and slowing growth in China have lowered expectations of future growth below what they were before the August shock in financial markets, and both continue to weigh heavily on the economic outlook.
The 10 indicators that comprise the leading index usually do not all move in tandem. Typically, some may indicate an expectation of faster than average growth, while at the same time others may indicate an expectation of slower than average growth. The following table accounts for the contributions of each towards faster or slower growth than the trend of 2.9 percent. The index value is their sum.
In September, four indicators contributed to a forecast of above-trend growth: total nonagricultural employment, the unemployment rate, initial unemployment claims, and construction employment. Two indicators contributed to average-trend growth: sales taxes, and the interest rate spread between 10-year and 3-month U.S. Treasury securities. Four indicators contributed to below-trend growth: withholding taxes, consumer confidence, the Bloomberg stock index for Massachusetts, and motor vehicle sales taxes.
In the three-month period July through September, four indicators contributed to a forecast of above-trend growth: the unemployment rate, initial unemployment claims, construction employment, and motor vehicle sales taxes. Two indicators contributed to average-trend growth: sales taxes, and the interest rate spread between 10-year and 3-month U.S. Treasury securities. Four indicators contributed to below-trend growth: total nonagricultural employment, withholding taxes, consumer confidence, the Bloomberg stock index for Massachusetts.
The current and historical quarterly estimates for state domestic product growth include adjustments for changes in productivity growth. These adjustments are estimates of the quarterly deviations from trend in the growth of the ratio of output to employment and output to wage and salary income. In the third quarter of 2015, these adjustments subtracted 2.4 percentage points from the annual rate of growth. In the second quarter, these adjustments added 1.3 percentage points to the annual rate of growth. In the first quarter, these adjustments subtracted 2.3 percentage points from the annual rate of growth. For the forecast of state domestic product growth in the third quarter of this year and the second quarter of next year, productivity growth is assumed to return to its trend.
Several recent months of the indices are revised each release. These revisions are a result of the statistical method used to create the index, as well as revisions in the underlying indicators.
All of the indicators except interest rates refer to Massachusetts. The current index is composed of four indicators: nonagricultural employment, withholding taxes, sales taxes, and the unemployment rate. The leading index includes these four current indicators plus the other six (leading) indicators in the contributions table. All of the indicators are as of September, except for interest rates and the Bloomberg stock index for Massachusetts, which are through October 26. The MassInsight Consumer Confidence Index is released every third month. Intervening months are interpolated, and changes in the Conference Board's Consumer Confidence Index for the U.S. are used to extrapolate to the current month of the index, as needed. Series measured in current dollars or values, i.e., withholding taxes, sales taxes, the Bloomberg stock index, and motor vehicle sales taxes, are deflated by the U.S. consumer price index for all urban consumers, excluding food and energy.
For a description of the methodology used to construct these indices, see: Alan Clayton-Matthews and James H. Stock, "An application of the Stock/Watson index methodology to the Massachusetts economy," Journal of Economic and Social Measurement, vol. 25 (1998/1999), pp. 183-233.
Dr. Alan Clayton-Matthews
Northeastern University, School of Public Policy and Urban Affairs
October 29, 2015