The most recent MassBenchmarks Board meeting began with a review of economic data showing slowing growth, a number of growing concerns heading into 2023, as well as some better-than-expected bright spots on the payroll employment and demographic sides. Payroll employment continues to expand and the unemployment rate remains low, but real gross domestic product in Massachusetts, recently on par with U.S. averages, is now underperforming the nation’s. On the positive side, most major industry sectors, with the exception of finance, are showing payroll jobs growth through early 2023. Somewhat of a surprise compared to previous trends, Massachusetts has shown a recent, though hesitant, uptick in the size of its labor force and working age population.   

Consistent with past meetings, the Board continues to have a number of concerns about underlying weaknesses as well as structural issues that could chip away at the longer-term competitiveness of the Massachusetts economy. For example, real GDP growth is slowing and may turn negative in 2023, the working age population despite the recent uptick is not expected to grow significantly in coming years, inflation is falling but at a stubbornly slow pace, and state tax revenues appear to have plateaued. The combination of a drawdown in savings built up during the pandemic, high inflation, challenges in accessing capital, and a changeable stock market are also taking a toll on consumer confidence in Massachusetts. Massachusetts’ perennial structural issues of housing affordability, high energy and childcare costs, and a troubled transportation system continue to be seen as dampening the state’s competitiveness and its ability to meet its economic potential.         

After declining in the first two quarters of 2022, Massachusetts’ real gross domestic product (GDP) swung back into growth during the latter half of the year. Overall, the rebound in state and U.S. economic growth in late 2022 came despite geopolitical headwinds, inflation, and the lingering effects of the pandemic. However, the growth in GDP is now expected to halt as we head into mid-2023. Current MassBenchmarks estimates see GDP growth having fallen to only 0.1 percent in the first quarter and projections are now showing possible declines of −0.1 percent and −0.6 percent, respectively, in the second and third quarters of the year. U.S. GDP growth is also trending downward (and possibly going negative by the third quarter) but the forecast calls for less severe declines than are expected in Massachusetts. With consumers and businesses confronting rising prices and the boost in interest rates, the higher-than-expected growth seen in late 2022 has now eased.        

Payroll jobs growth continues to be a strong point for the Massachusetts economy. Massachusetts slightly outpaced the U.S. in jobs growth during the first quarter of 2023 with the state growing at an annualized rate of 3.0 percent compared to the U.S. rate of 2.7 percent. Looking at the year-over-year data, Massachusetts and the nation posted payroll employment increases of 2.8 and 3.0 percent, respectively. With the steady growth in employment, Massachusetts finally surpassed its February 2020 pre-pandemic peak by 15,000 jobs in March 2023, hitting a new record of over 3.75 million total jobs. Even with this new record, however, 31 states have posted faster employment growth rates since February 2020. Within New England, New Hampshire and Maine have added jobs more quickly than Massachusetts over the past three years.

Since cresting during the early stages of the pandemic in 2020, the Massachusetts unemployment rate is continuing on a downward trend. The April unemployment rate stood at 3.3 percent, down from 3.7 percent in April 2022 and just below the U.S. rate of 3.4 percent. The declining unemployment rate, while a positive indicator, has been in part the result of a declining labor force. That said, the labor force has actually been increasing month-over-month since early 2023, but April’s labor force size still remained smaller than it was in April 2022. Similarly, household employment also experienced an increase in early 2023 but remains behind the higher levels it reached in the first part of 2022. The recent growth in both the labor force and household employment is a switch from what had been observed in prior Board meetings but it remains to be seen if this growth carries into the future.

New estimates of the Massachusetts working age population—individuals ages 16 and over—that show an increase from mid-2022 to present, also corroborate the improvements in the size of the labor force. Finally, the state’s labor force participation rate continues to hover at 65 percent. While lower than the pre-pandemic rate of 67 percent, Massachusetts is now outperforming the New England region on this measure. 

As Massachusetts continues to add payroll jobs across most sectors of the economy, the climb in construction employment has been a particular standout. While healthcare and education continue to increase and professional and business services jobs appear to be slowing in growth, construction has recently been the fastest expanding major sector in Massachusetts. As there has been a falloff in residential building, a surge in commercial building (includes both office and lab space) is likely fueling Massachusetts construction activity and jobs. On one side, this represents optimism for growth in the state, but on the other, there is concern that the volume of new space becoming available will be difficult to absorb. Recent data from Commercial Edge’s May 2023 National Office Report show metropolitan Boston had 14.8 million square feet of office and lab space under construction, an amount greater than in other large cities like Manhattan, San Francisco, and Seattle. While much of the construction is supporting the state’s burgeoning life sciences industry, which tends to have high in-office presence, it is nonetheless coming in the face of rising office vacancy rates and lower rents in the Downtown Boston office market, as hybrid and remote work arrangements have for the time being proved quite durable. 

The active construction, combined with a sizeable pipeline, raises real concerns about the financial aspects of this spilling over onto banks, real estate investment trusts (REITs), and insurance companies. A lurking banking risk tied to large-scale commercial construction could hurt regional banks and thus endanger some of the lending necessary for business growth, start-ups, and housing. For these reasons, the recovery of Downtown Boston is attracting attention. On the one hand, vacancy rates are high and workers have not fully returned to the office, but on the other hand the city is performing better than many others in its peer group. Boston has so far avoided a major surge in crime and homelessness, but San Francisco provides a cautionary tale of what could happen due to having fewer workers downtown. 

In conclusion, there are mixed messages about the Massachusetts economy. On the positive, there is the fact that results like payroll jobs have defied expectations on the upside for several months running, and construction is in the midst of a boom. On the downside, the 0.1 percent real GDP growth estimate for the first quarter of 2023 points to an economy losing steam. Overall, the Massachusetts economy is currently viewed as fragile by the Board. There are many risks including inflation, declining consumer confidence, the exposure of banks to commercial real estate, the Russia-Ukraine conflict, and the possibility of a Chinese downturn affecting the global economy. 

This summary reflects the discussion of the members of the Editorial Board of MassBenchmarks at its meeting on May 19, 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.