Massachusetts starts year with surprising signs of economic strength but potential challenges on the horizon are concerning, observes the MassBenchmarks Editorial Board
Real GDP and jobs growth stronger than expected in the latter half of 2022 but mask issues that may undermine future competitiveness and growth.
The most recent MassBenchmarks Board meeting began with a review of economic data demonstrating better than expected economic performance. Real gross domestic product, in recent quarters, is now on par or exceeding U.S. averages, payroll employment surged towards the end of 2022, and the unemployment rate has seen one of the largest drops in the country. Additionally, nearly all major industry sectors in Massachusetts are participating in the recent growth.
Despite this confluence of positive trends, the Board has considerable concerns underlying fissures in the economy that could limit the longer-term competitiveness of the Massachusetts economy. For example, real GDP growth is forecast to slow going into 2023, the working age population is showing little or no growth, inflation risks remain present, and state tax revenues appear to have plateaued. Post-pandemic shifts in living and working patterns are also weakening traditional employment relationships. This may be problematic in the longer term for the thriving tech economy and other industries that have benefited from agglomeration economies of location in central business districts. While the effects of the pandemic will be playing out for some time, the Board identified transportation, affordable housing, and geographically targeted economic development policies as critical factors for helping Massachusetts strengthen its competitiveness now and in the future.
Massachusetts has been outpacing the U.S. in jobs growth with the state growing at an annualized rate of 4.2 percent during the fourth quarter compared to the U.S. rate of 2.5 percent. Payroll employment growth in Massachusetts continued to be robust through the second half of 2022 and there were 3.9 percent more jobs in Massachusetts in the fourth quarter of 2022 than in the fourth quarter of 2021. However, U.S. employment surpassed its previous peak (in February 2020) by about 2.0 percent while Massachusetts has recovered beyond its previous jobs peak by only 0.3 percent.
The continuing decline in the unemployment rate is also an encouraging trend for the Massachusetts economy. The December unemployment rate in Massachusetts stood at 3.4 percent, down from 4.6 percent in December 2021 and somewhat below the U.S. rate of 3.5 percent. While this trend may sound upbeat, the declining unemployment rate has been in part the result of a declining workforce. The December 2022 labor force was smaller than in December 2021. Moreover, the state’s labor force participation rate, 67 percent prior to the pandemic, has dropped and is now hovering in the 65 percent range. Both points underscore the challenge presented by a scarcity of available workers going forward.
For better or for worse, Massachusetts is inevitably affected by and usually in step with national economic cycles. However, there are a number of issues, some structural, that came to light during the Board meeting. For starters, the impressive growth in payroll jobs (data based on a survey of Massachusetts employers) is not matched by household employment figures (data based on a survey of Massachusetts households). These two data series have historically moved in tandem, but for the past six months or so they have diverged (i.e., the number of people in the household survey indicating that they are working has gone down even while the state’s employers report significant increases in jobs). The recent divergence between the payroll and household survey employment trends is accentuating a known problem – that Massachusetts is challenged to supply the labor that businesses in the state need to grow. With little or no labor force or working age population growth, the state’s employers are having to draw on labor from elsewhere. Recent growth in the size of neighboring New Hampshire’s labor force (in contrast to the Massachusetts decline) may exemplify that Massachusetts is bringing in labor from other states, whether in-commuting or working remotely. Many of these workers may have previously lived in Massachusetts, but have since relocated to New Hampshire while keeping their Massachusetts-based jobs. That trend reflects the combination of being able to work from anywhere, together with Massachusetts’ expensive housing and childcare and its unreliable transit options.
With a declining labor force and shrinking working age population, Massachusetts will need to address the longer-term threats to its economic competitiveness. In the wake of the pandemic, the state’s desirable advantages in density and agglomeration appear to be eroding as a factor in business and worker location decisions. With these headwinds, Massachusetts will need to initiate policies that address its high costs, housing, and transportation issues. The state’s numerous advantages in technology development, research, healthcare, growing industries, well-paying jobs, education, culture, and recreation continue to make it a place where people want to live and work, but onerous costs are diverting people to other states with less expensive housing as well as amenity rich areas where they can work remotely.
A multi-pronged approach is needed to focus on these issues. This would include addressing the housing shortage, including such initiatives as the MBTA Communities law allowing for higher density near transit-served communities. The state can also emphasize place-based economic development, rather than firm-based incentives, to put greater emphasis on retaining and attracting the working population. The pandemic has triggered a shift from centralized in-person work concentrated in large and dense urban areas to decentralized and virtual employment (remote work, fewer office days, and workers not living in proximity to their employer) in many industries. With this shift, the economic development focus needs to redouble its embrace of making Massachusetts communities and neighborhoods affordable, attractive, and accessible while offering the amenities workers are seeking where they live.
An important part of this equation is a combination of more affordable housing and getting public transportation back on track. Unreliable, delayed, and slow transit service make commuting and other trips a challenge. People working remotely still need to reach the city with some frequency, and unreliable public transit adds to difficulties and costs for workers living in the cities as well as those residing in more distant locations. In particular, the MBTA should and can be an asset for Massachusetts in attracting workers and business but if it is compounding their existing frustrations, it is yet another motivation for some to pack up and move. The recent steps to improve the MBTA and the new Multi-Family Zoning Requirements for MBTA Communities legislation are examples of how affordable housing and transportation policies can be linked.
Note that the recent collapse of Silicon Valley Bank (SVB) occurred after the February 24th meeting of the Editorial Board of MassBenchmarks. The banking situation clearly represents a new issue that bears close following and increases the downside risks for 2023. This is a national matter, but Massachusetts is highly exposed because of the local concentration of tech, health startups, and the venture capital industry.
This summary reflects the discussion of the members of the Editorial Board of MassBenchmarks at its meeting on February 24, 2023 and it reflects the economic data available up to that date. It was prepared by Branner Stewart, Senior Research Manager at the UMass Donahue Institute, 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 broad consensus of the Board regarding the current state of the Massachusetts economy.