The Massachusetts economy has fallen into negative growth as downside risks mount, observes the MassBenchmarks Editorial Board
Massachusetts faces disproportionate impacts from changes in federal policies.
May 2025
As Massachusetts heads into the middle of 2025, its economy, along with the nation’s, has been buffeted by an onslaught of real and proposed changes in federal policy. These volatile shifts in policy are raising uncertainties about the direction of future economic growth, both short- and long-term.
Massachusetts never completely re-emerged from the pandemic with the types of economic momentum it witnessed during the 2010s, as evidenced by jobs numbers that still remain below those of February 2020. It is now seeing the economy switch from the slow growth recorded in 2024 to decline in the first quarter of 2025. Massachusetts real gross domestic product (GDP) decreased at an annual rate of 1.1 percent in the first quarter, according to MassBenchmarks, while U.S. GDP declined at a much slower annual rate of 0.3 percent, according to the U.S. Bureau of Economic Analysis (BEA).
The U.S. drop in GDP was the first in three years. This occurred as companies eager to stockpile imported goods ahead of Trump’s tariffs probably diverted spending away from domestically produced goods and services. Given that unusual dynamic, we could see the economy bounce back strongly in the coming months if trade patterns normalize. In Massachusetts, weaker jobs performance than the nation’s was reflected in a more pronounced decline in GDP during the first quarter. While less tangible than measurable imports, the fall in GDP is compounded by a marked uncertainty about what the future may bring for both businesses and consumers. Unsure of future pricing and the possibility of supply-chain disruptions, businesses are reluctant to invest longer term, beyond stockpiling imports. Consumers, on the other hand, are becoming ambivalent about their own income-earning prospects and expenses, and are now frontloading the purchase of some goods, including motor vehicles, to avoid the possibility of tariff price hikes later. All the uncertainty around the economy right now has left businesses and consumers wondering if prices will go up, or if the current concerns (and resultant changes in behaviors) may fade.
A combination of an evolving, but still indeterminate, trade policy, a steady stream of dramatic changes in federal policy and shifting budget priorities are now setting off declines in business and consumer confidence. The Associated Industries of Massachusetts (AIM) Business Confidence Index sank to a post-pandemic low of 41.5 in April (on a 100-point scale; 50 is considered a neutral outlook) with businesses citing increased costs of materials and supplies as well as government funding cuts affecting their customer bases. AIM’s April confidence reading dovetails with Conference Board Consumer Confidence Index which dropped to its lowest level in nearly five years in April. The souring sentiment among businesses and consumers dampens the economic outlook for both Massachusetts and the country. A board member noted, “business sentiment matters, and if they think future growth will be weaker, then they will downsize their spending accordingly,” with consumption and investments being put on hold.
Looking towards mid-2025, economic volatility and uncertainty continue to be fueled by a series of tariff announcements, threats, and postponements, clouding the economic outlook. The major stock indexes have responded negatively to news of proposed high and onerous tariffs on key trading partners (often reciprocated), but then recovering sharply when tariff threats are relaxed. In this environment, economists are upping the odds of recession, perhaps later in 2025.
Shortages, tariff-related price increases, and supply chain troubles are not yet reflected in the data, but that may change heading into June and the summer. For many businesses it is now too expensive to do business with China, which is resulting in fewer scheduled container ships entering U.S. ports, including Boston. Due to the magnitude of trade with China, the effects of the drop in cargo volume are expected to be seen by retailers as they try to maintain stock and by manufacturers for the parts and components needed to maintain production. These types of supply disruptions can potentially reverberate adversely throughout the Massachusetts and national economies. Countering this negative scenario, there are now signs of a de-escalation with the China tariff situation which may help to prevent these effects from becoming more entrenched. With all this said, the economic outlook is tentative and could change abruptly depending on the course of U.S. tariff policy.
The impacts to the economy from tariffs, especially if they are lifted, may be relatively short-lived. For Massachusetts, however, there are longer-term risks associated with federal budget cuts and policy changes, beyond tariffs, which form a disproportionate risk to the state economy. The Board noted that “downside risks are numerous, and Massachusetts is exposed on multiple fronts.” For example, Massachusetts has the second highest dependence on private non-profits (e.g., universities, colleges, non-commercial research institutions, hospitals, etc.) to support its economy, with this grouping of industries accounting for 17.6 percent of state employment compared to 9.9 percent for the nation.1
These are the types of enterprises seeing some of the sharpest reductions (or threats of cuts) in federal funding. Perhaps most visibly, cutbacks in National Institutes of Health (NIH) and National Science Foundation (NSF) funding threaten ongoing research taking place at the state’s universities and hospitals. (Massachusetts has the highest concentration of NIH funding in the country2 and is in the top quartile of states with new NSF-funded research.) The range of research activities taking place in the state are a foundation for the continued development of the state’s life sciences industry, commonly considered the world leader. Stoppages and reductions in the intensity of research due to the NIH cuts will weaken the statewide life sciences cluster that has taken decades to cultivate. The downstream effects of these cuts will affect both Massachusetts and national competitiveness long-term. Compounding the actual and potential drops in scientific funding, Massachusetts employers and universities have long attracted global talent and more stringent federal immigration policies may both limit and discourage international workers as well as students from coming to the state. The combined threats to scientific research funding and to the talent stream jeopardize the fundamental human capital strengths that set the Massachusetts economy apart competitively.
The outlook for the Massachusetts economy is tentative. The downside risks cited by the Board are clear and, should they be realized, they will bear a disproportionate impact on Massachusetts. The state has successfully brought together research, business, and educational capabilities — all of which contribute to the human capital that has made Massachusetts a recognized leader in innovation. These are now threatened.
These risks, however, may be mitigated depending on the degree to which recently introduced changes to federal policy on tariffs, research funding, and restrictions on immigration become implemented. The slew of challenges to announced federal policy changes may either ease or compound the risks to the Massachusetts economy, depending on how they are resolved. Ultimately, the exact impacts to the state will not be immediately revealed in the data, though there is concern about damage already done to supply chains, universities, and the fraying of established international partnerships. Additionally, the state’s budget priorities could be seriously disrupted if there is a need to make up the difference in federal cuts to Medicaid funding and transportation grants, among other programs. Through this environment, Massachusetts should strive to counter or minimize possible negative effects while keeping critical long-term initiatives moving forward.
[2] $3.5 billion in NIH funding in 2024 translates to about $485 in funding per Massachusetts resident.
This summary reflects the discussion of the members of the Editorial Board of MassBenchmarks at its Spring meeting on May 1, 2025, 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.
