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in collaboration with the Federal Reserve Bank of Boston

Notes from the Board

Massachusetts economy growing strongly declares MassBenchmarks Editorial Board

But positive signs offer little consolation for many displaced workers, leading economists warn.

The Massachusetts economy is doing well at the moment, emerging from the recession more quickly than the nation. This assessment is supported by both the MassBenchmarks Current and Leading economic indexes for the state. The current economic index increased at an annualized rate of 5.9% in April, and represents an estimate of the growth of gross state product for Massachusetts. The leading economic index, which forecasts annualized growth in the state over the next six months, was 5.1% for April.

The state is adding jobs in nearly every sector, tax revenues are expanding again, and the Commonwealth’s gross state product is outperforming the nation. In contrast to previous economic downturns and recoveries, the mix of industries in the state has been an advantage. Health care continued to add jobs throughout the downturn, as is typical for this sector. The high-technology sector performed "ahead of the curve" during this cycle, not experiencing a severe downturn, and recovering both faster and sooner than is typical coming out of a recession. In addition, because there was never a housing construction boom here, the fallout from declining house prices and the bust in housing construction have affected the state less than the nation.

What is next for the state is the key question, and there are downside risks ahead, similar to those shadowing the national recovery. Turmoil in Europe, brought on by the sovereign debt problems of Greece and potentially other nations, will force these countries to adopt tighter fiscal policies, thereby lowering European growth rates in coming quarters. Europe is an important importer of the state's merchandise exports, and a slowdown in Europe will have a direct negative impact on Massachusetts manufacturers. In addition, increased financial instability in Europe has the potential of being transmitted across the Atlantic to the United States. If that happens, and national economic growth falters, the state's recovery would likely be blunted. Thus, policies adopted in the Eurozone will have implications for the Massachusetts economy.

A continuing trouble spot for the Commonwealth (and other states nationwide) is the condition of state and local government budgets, which typically recover later than the private economy. Stimulus funds from the federal government have helped to reduce budget gaps, but those funds are scheduled to phase out in 2011. State government structural deficits loom even after the recession ends. "Local aid" support from the state government continues to be cut, and many cities and towns are at risk of laying off teachers, police, and firefighters, even as recession-elevated unemployment is forecast to remain relatively high, albeit below the national rate. These types of jobs have in the past constituted perhaps the most secure of middle class jobs in the state. Given the sharp decline of manufacturing and construction employment during the downturn, the recession has brought about an assault on middle class jobs that the recovery is not, at the moment, reversing.

Over the long term, replacing these middle class jobs looms large as a key public policy challenge facing the state. Sharply uneven economic prospects across the state also continue to be an issue, as cities like Lawrence, Springfield, Fall River, and New Bedford persist in their economic and fiscal struggles.

For now, however, the news on the economy is good, as the state continues to rebound from the recession.

This summary reflects the discussion of the members of the editorial board of MassBenchmarks at its meeting on June 7, 2010. 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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