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Notes from the Board

Mixed signals call for cautious optimism declares the MassBenchmarks Editorial Board

Regional imbalances and widening inequality provide important context for recently reported robust growth.

As measured by the MassBenchmarks Current Economic Index, the Massachusetts economy ended 2013 on a high note. This comes as somewhat of a surprise. At the onset of 2013, there were a number of looming threats to the Commonwealth's economy including the federal budget sequester, which has and can be expected to continue to negatively affect the Bay State's leading high-technology and research institutions; tax increases, including one imposed on upper-income earners that has had a disproportionate impact on the Commonwealth; and an ongoing recession in the European Union, one of the state's most important trading partners.

In recent months, these threats have receded into the background. Despite tax increases, retail spending as measured by state sales tax revenues ended the year strongly. The Eurozone is emerging from its recession and recent state export data are beginning to reflect slowly improving conditions internationally. And the recent federal budget deal has removed some lingering policy uncertainty even as continuing federal fiscal austerity continues to serve as a drag on state and national economic growth.

Recent payroll employment data are also encouraging. Preliminary estimates indicate that Massachusetts created over 50,000 jobs last year, a stronger pace of growth than that of the nation, and faster job growth than that experienced during the state's recovery from the recession of 2001. Notably, construction was among the state's leading job creators in 2013 suggesting that the recovery in the housing market is finally beginning to benefit the Bay State's long struggling building trades sectors. But, caution should be taken as these employment data are subject to revision and the experience of recent years reminds us that these revisions can be large. The need for caution is underscored by household survey data that suggest a much weaker employment picture than that suggested by the payroll data alone.

Healthy increases in both state withholding and sales taxes in 2013 imply strong state income growth. While very encouraging, these data tell us little about the ways in which these income gains are being distributed across the population and how broadly the growing prosperity they imply is being shared across the Commonwealth. The challenge of income inequality, an increasingly pressing issue for the nation, faces the Commonwealth as well and may be part of the explanation for the mixed signals we are seeing in the employment data.

With those caveats in mind, the state's economic prospects in coming months seem positive. The national economy seems poised for moderate growth, as household balance sheets continue to heal, the housing market continues its recovery, and the nation slowly adapts to a new federal fiscal reality. The European Union is expected to continue to slowly emerge from its recession and Asian economies appear to be either stabilizing or growing. All these developments bode well for the state's economic outlook.

But while the Board is generally optimistic about the near-term economic outlook for Massachusetts, this optimism is decidedly cautious. Conflicting employment data are making it difficult to get a solid read on labor market conditions, the state's unemployment rate remains troublingly high, and quality job opportunities remain scarce for the young, the poorly educated, and the long-term unemployed.

Income gains in the sectors that are growing seem to be going to the highest income groups, who benefit disproportionately from the continued growth of the state's vaunted innovation economy. And continuing regional imbalances persist as the Greater Boston region continues to reap the lion's share of the rewards of innovation-fueled economic growth. Meanwhile, much of the rest of the Commonwealth continues to lag behind. These disparities are most starkly reflected in regional unemployment rates, which remain uniformly higher in areas outside of the greater Boston area.

This summary reflects the discussion of the members of the Editorial Board of MassBenchmarks at its meeting on February 7, 2014. It was prepared by Executive Editor Robert Nakosteen and was reviewed and edited by the members of the Editorial Board. While discussion among the Board members was spirited and individual Board members hold a wide variety of views on current economic conditions, this summary reflects the consensus view of the Board regarding the current state of the Massachusetts economy.

MassBenchmarks is the journal of the Massachusetts economy and is published by the UMass Donahue Institute in collaboration with the Federal Reserve Bank of Boston. Its editorial board is made up of leading economic analysts from across Massachusetts. The opinions expressed by the Editorial Board do not necessarily represent the opinions of the Federal Reserve or the University of Massachusetts.


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