Gross Domestic Product and Growth

The Massachusetts economy continues expanding, but the narrative masks a troubling reality about who benefits from that growth.

U.S. GDP for the first quarter of 2026 came in at an annualized 2.1 percent, essentially steady with the 2025 growth rate. What's keeping growth afloat, however, tells an important story: business investment in equipment and intellectual property—particularly in artificial intelligence—is driving expansion. For Massachusetts and its tech-driven economy that both supplies as well as applies AI, the picture is slightly rosier in terms of GDP growth. State GDP growth came in at 2.4 percent during the first quarter, slightly exceeding the national average. The state is seeing significant activity in the development and application of AI in areas ranging from air traffic control and robotics to life sciences and machine intelligence. While Massachusetts does not have a “big four” headquarters (tech titans—Meta, Microsoft, Alphabet, and Amazon—collectively spent half a trillion dollars on capital expenditures in annualized 2026 Q1 terms, predominantly for AI infrastructure), the state’s economic output benefits from the national surge in AI investment and development. 

A critical issue for both the U.S. and Massachusetts is how this economic growth is distributed. The economy's expansion is concentrated in business investment whose returns flow largely to equity holders rather than workers. Meanwhile, consumption—the aggregate spending by households across the entire income spectrum—is growing more slowly. The divergence between investment-driven growth and consumption-driven growth suggests that benefits are concentrating among those with capital, not those with labor to sell.

Employment and Labor Market Conditions

The Massachusetts labor market has entered a cautious pause, with signals suggesting tighter conditions ahead. Payroll employment growth has slowed with a net loss of 2,300 jobs between May 2025 and May 2026. Recent monthly figures have varied, with some showing growth and others decline, suggesting an unclear trajectory rather than a confident trend.

This ambiguity masks uneven sectoral dynamics. Construction has held relatively steady fueled by infrastructure projects. Education and healthcare have continued to lead growth while manufacturing is showing relative stability in terms of job counts. These bright spots, however, cannot offset troubling patterns in other sectors. Notably, business services employment (a broad sector that includes such areas as scientific R&D, law, consulting, engineering, advertising, and computer systems design)—historically a Massachusetts strength—has been conspicuously missing from the jobs growth narrative, although there have been signs of improvement during the spring.

Wage and salary income presents another complicated picture. This segment of income (others being transfer payments like Social Security and investment income from dividends, interest, and rent) received an unusual boost from a larger-than-normal bonus season, helping to pump up overall income growth figures in Massachusetts (noting that in recent quarters that are less affected by bonuses, Massachusetts wage and salary payments still grow at a rate that is above that of the U.S.). However, this surge suggests that much wage and salary growth is concentrated among the types of higher earners who receive bonuses. Millionaire's tax receipts running $600 million above the prior fiscal year confirm that income gains are flowing disproportionately to top earners, with most Massachusetts workers experiencing more modest income growth.

Unemployment Rates and Labor Market Softening

The unemployment rate in Massachusetts now exceeds the national rate (4.5 percent in May versus 4.3 percent for the U.S.)—a reversal of the historical pattern where the state typically runs about a percentage point below the U.S. The U-6 unemployment measure, which includes involuntary part-time workers and marginally attached workers, shows the Massachusetts labor market in slightly better shape than the nation’s. Overall, Massachusetts unemployment trends, whether headline or U-6, point to a softness in labor demand in the state’s job market.

Productivity

Massachusetts ranks among the nation's most productive states, demonstrating labor productivity (GDP per worker) that is rising faster than both the U.S. average and every region of the country. By this measure, the state ranks 6th nationally (New York is first, buoyed by its large finance sector). The Massachusetts productivity edge is, statistically speaking, a national asset.

However, the mechanism driving our state’s high and increasing productivity masks an uncomfortable truth—production is increasing without jobs growth. Over the past five years, hours worked have increased relatively little. This dynamic—more output but relatively flat labor input—is precisely what artificial intelligence and automation may deliver. That said, the Board did not have a consensus about what AI’s future impact would be on employment and skill levels. New technologies are often disruptive in the short-term, but in the longer term the effects of productivity growth on output and income are the dominant outcome.

Labor Force Participation

Labor force participation and resident employment (as compared to payroll employment) in Massachusetts have been declining since early 2025, a shift driven by little growth in the working-age population combined with an expanding older population. Age-specific participation rates underscore this pattern: prime-age workers (typically 25-54) show steady or slightly increasing participation, but overall participation is falling because workers 55 and older are aging out of the workforce and, critically, not being replaced by younger cohorts entering from other age groups. Restrictions on the flow of immigrants into the country is compounding this issue for Massachusetts. The demographics combined with an obstructed flow of foreign workers point toward a tightening labor-supply constraint, even if hiring demand has weakened. Education remains a protective factor, with higher education levels correlating with the highest participation rates. Prime-age workers with college degrees remain more robustly employed, but this does not extend uniformly to those without higher credentials or to workers over 55, suggesting the Massachusetts labor market continues to bifurcate along skill and age lines. Even recent college graduates, however, are no longer seeing their degrees as a guarantee of job market success. 

Inflation and Price Stability

Inflation has ticked upward. The personal consumption expenditures (PCE) price index, the Federal Reserve's preferred inflation measure, remain elevated (4.1 percent annualized in May) and well above the 2 percent target. Inflation is broad-based, present in durable goods, non-durable goods, and services—each category running above the 2 percent benchmark. Recent New England inflation figures show the region tracking close to the U.S. averages.

Global trade disruptions, supply chain vulnerabilities, and commodity shortages (e.g., fuels and fertilizer) are the key factors driving inflation readings higher. The shock to energy prices is likely dampening consumer purchasing, particularly for lower-income households already constrained by slow wage growth.

Economic Outlook

The economic outlook carries significant vulnerability. Multiple policy headwinds are weighing on Massachusetts: immigration restrictions affect labor supply and innovation in high-skill sectors; R&D funding concerns threaten the state's knowledge economy; and Medicaid reductions will constrain consumer spending and healthcare provider employment. Weakening consumption growth, notably for low- to mid-level earners may be a harbinger of deeper economic problems ahead—a warning sign that households are losing consumer confidence or facing financial strain.

The Board noted the regional disparities in economic opportunity in Massachusetts. Rural areas and Western Massachusetts are more sensitive to fuel prices and less likely to see growth from the sectors driving current expansion—technology, finance, biotech, robotics, automation, etc. These regions face a double burden: vulnerability to economic shocks (fuel prices) and being less integrated with the state’s key growth sectors. The metropolitan Boston area's strengths mask a regional divide that could widen if current trends persist.

Board members emphasized that Massachusetts’ current economic performance is solid while simultaneously acknowledging that downside risks are real and unevenly distributed. The economy appears to be "hanging in there," but this aggregate stability conceals several areas of concern. For large swaths of the population—younger and older workers and other vulnerable groups struggling to find employment, workers in regions disconnected from AI-driven growth, middle-income households watching wage and salary gains flow to the top—current conditions may already feel like a slowdown. An unanticipated shock or event—a financial market disruption, an extended energy price spike, a geopolitical crisis—could quickly tip forces in the wrong direction, turning what is today a bifurcated expansion into more of a broader-based contraction.

This summary reflects the discussion of the members of the Editorial Board of MassBenchmarks at its Spring meeting on May 29, 2026, and it reflects the economic data available 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.

 

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