Following a year when the state’s rate of economic growth first exceeded and then fell short of national growth, the Massachusetts economy is expected to track national growth in the coming months. For both the nation and the state, there is cause for cautious optimism, arising from a number of recent positive indicators. For the state, the unemployment rate is down, and well below the national rate. Gross state product has grown at above or near the national rate for many quarters. Initial claims for unemployment compensation are falling. The MassBenchmarks Leading Economic Index anticipates faster growth in the months ahead. Nationally, most indicators of the labor market — employment growth, the unemployment rate, initial claims for unemployment compensation — are headed in the right direction. Retail sales are strong. Housing is showing some tentative signs of improvement. All these factors suggest modest but improving economic growth during 2012.

Caution must be exercised, however, due to threats beyond the state’s borders. The impact of events in Europe could affect the state both through a decline in exports and through financial contagion. Forty percent of international exports from the Commonwealth have a European destination. A slowdown in Europe or a recession there will negatively impact these export flows. A full-blown financial crisis originating in Europe, as recent history shows us, can rapidly spread throughout the global economy. The recent creep in oil prices and the possibility of supply disruptions also remain a concern. For example, if Iranian oil supplies needed to be replaced, there would be little buffer production capacity left to moderate further price increases. Other risks include further fiscal tightening from the federal government, further household deleveraging, and continuing high levels of uncertainty among households and businesses.

If these sources of caution can be navigated without mishap, economic growth is expected to continue at a modest pace. And unless labor productivity growth turns out to be more moderate than historical norms lead us to expect, a modestly growing economy will bring down the unemployment rate only very slowly. To date, the falling unemployment rate in the state masks continuing distress in some segments of its labor market and regions. Many discouraged workers have left the labor force entirely; others are working part time involuntarily. For skilled and unskilled blue collar workers alike, construction workers, and young workers in virtually every occupation, unemployment far exceeds job openings. The plight of younger workers is especially worrisome and is the result of a weak economy that is experiencing reduced job turnover due in part to older workers postponing retirement. One consequence of this is a household formation rate at an all-time low, as young adults increasingly lack the economic wherewithal to form new families. The present economy is creating a legacy of lost potential and increasing income inequality.

Massachusetts faces a future that is hopeful, cautionary, and painful. The state has many sources of strength, but pockets of weakness and severe hardship remain in many of our older cities, in segments of our labor market, and in sectors such as housing. We can only hope that a continuing economic recovery is strong and broad enough to encompass all segments of the economy.

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To help identify industries and occupations in which jobs are available ― and to detect emerging labor and skills shortages ― Massachusetts developed a statewide job vacancy survey beginning in 2002. Regrettably, this survey was discontinued in 2010. The MassBenchmarks Editorial Board calls upon state officials to reinstate this survey or to develop an alternative strategy for providing critical labor supply and demand data for Massachusetts and its regions.

This summary reflects the discussion of the members of the Editorial Board of MassBenchmarks at its meeting on February 17, 2012. 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.