Growth in real gross domestic product (GDP) in Massachusetts and the U.S. has remained unexpectedly high in recent quarters and Massachusetts’ relative payroll jobs performance continues to outpace its New England neighbors. The growth in both the state and U.S. comes despite high interest rates that are now appearing to have the desired effect to lower inflation. The Massachusetts unemployment rate is down to a record low level. Most major industry sectors in the state also experienced payroll jobs growth through the first three quarters of 2023, again showing that the economic improvements are broadly based.

Heading into the last part of 2023 and early 2024, however, the economy is forecast to start cooling. Spending by Massachusetts consumers on goods and motor vehicles is also trending downwards. Navigating the economic ramifications of the confrontations in Ukraine and in the Mideast, the potential for a future U.S. government shutdown, and an economic slowdown in China are among the headwinds the economy faces ahead.

GDP

Massachusetts had been expanding faster than the U.S. as a whole in real gross state product (GDP) growth for about a year (mid-2022 through mid-2023). That changed in the third quarter of 2023, however, with Massachusetts GDP increasing at a 3.8 percent annualized rate, according to MassBenchmarks, while U.S. GDP increased at a 4.9 percent annualized rate, according to the U.S. Bureau of Economic Analysis (BEA). That said, growth for both the state and the country was extremely robust during the third quarter.

The strong performance in the third quarter came as a surprise, as the July MassBenchmarks release was projecting an annualized rate of growth of less than one percent in the third quarter (+0.7 percent) and the Wall Street Journal Economic Forecasting Survey projected a 0.6 percent rate of growth for the U.S. Vigorous job creation and robust consumer spending during the summer months accounted for the unexpectedly strong growth, in addition to a meaningful uptick in inventories. The high growth, however, is expected to slow substantially in the fourth quarter and into 2024 as recent, consumer-led growth cannot be sustained indefinitely. As such, growth in Massachusetts GDP is expected to slow to a 1.9 percent annualized rate in the fourth quarter and to a 0.3 percent rate in the first quarter of 2024. U.S. GDP growth is projected to follow a similar trend, slowing significantly from the highs seen in the third quarter of 2023.

Employment

Payroll jobs growth through the first three quarters of 2023 pointed to a relatively strong Massachusetts economy — performance that was noteworthy given the efforts of the Federal Reserve to slow the economy. Payroll employment grew by 1.7 percent on an annualized basis in the third quarter in both Massachusetts and the U.S. However, it is unlikely that this pace can be maintained in the final quarter of 2023, and in fact payroll jobs in the state actually declined by small margins in September and October. Unemployment rates in the state are at historic lows, 2.8 percent in October as compared to 3.9 percent for the U.S. At this point in the economic cycle, and despite the very recent monthly jobs losses, much of the remaining slack in the labor market has been largely soaked up, making it more challenging to fill additional jobs moving forward.

Policy considerations

As Massachusetts heads into the last part of 2023 and into the coming new year, there is cautious optimism that the state’s economy will continue to expand, but there are numerous concerns. On the positive side, consumers have kept businesses afloat, construction levels are high, inflation finally seems to be slowing, and federal fiscal stimulus on infrastructure and technology investments (e.g., the CHIPS and Science Act) have helped prolong the economic expansion. Nationally, we can expect increases in military expenditures over at least the short-term that could also prop up growth, especially in defense-industry-intensive states like Massachusetts. This is tempered, however, by looming risks including two successive months of employment declines in the state, high interest rates, hesitancy by businesses to invest, volatility in the stock market, a Congress that continues to delay passage of a national budget, and the geopolitical risks associated with the conflicts in Ukraine and the Middle East.

Despite uncertainties, from a policy standpoint there is much that can be done at the state level, now and in the longer-term, to address inequalities and better position the state for future growth. High costs are putting a squeeze on residents, notably on the lower and middle-income populations. Although there has been a welcome recent uptick in the state’s working age population, Massachusetts has been experiencing a net-outflow of residents to other states since the pandemic began in 2020. Expensive housing and childcare, as well as a congested and unreliable transportation system, are factors that both limit access to economic opportunity and push some residents to leave for states with lower living costs.

With these challenges, the Board discussed policies to raise competitiveness, equality, and to do better in retaining and attracting young people to the state. Stimulus money set aside for childcare by the U.S. Congress is now running out, pushing parents to foot steep bills or contemplate leaving the labor force to care for young children. Massachusetts is addressing this issue, in part, through the recently expanded Child and Family Tax Credit. This and other policies like increasing the rental deduction, among others, will help compensate for the state’s high costs of living. The Board is concerned, however, if the state will have sufficient revenue to cover tax cuts (noting that cuts are concurrent with the revenue-generating “Millionaire’s Tax” implemented in 2023) while raising overall spending on childcare, housing, and transportation — critical pillars for Massachusetts to undergird present and future competitiveness. In the face of federal budget cuts, it is becoming more of an imperative for the state to step in and support the areas that are fundamental to sustaining its people and growing the economy.

In conclusion, the Massachusetts economy has undergone a period of substantial growth in recent years, including both a recovery and an economic expansion following the pandemic. Economic growth in the state, along with the national economy, likely peaked during the third quarter of 2023 and slower growth is expected heading into 2024. In this environment, Massachusetts will need to continue to coordinate policies that address high costs and inequality to encourage the growth of its labor force and set the stage for future economic growth. This is likely to include a more active role for the state to support beneficial programs, including childcare, that are seeing reduced funding due to a wind down of federal stimulus spending.

This summary reflects the discussion of the members of the Editorial Board of MassBenchmarks at its Fall meeting on October 27, 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.