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The Current and Leading Indices - December 2012

Massachusetts economy expands modestly in Q4, UMass Journal Report
Data revisions could change our understanding of economic conditions, analysts caution

Massachusetts real gross domestic product increased at an annual rate of 1.0 percent in the fourth quarter of 2012 according to the latest MassBenchmarks Current Economic Index released today by MassBenchmarks, the journal of the Massachusetts economy published by the UMass Donahue Institute in collaboration with the Federal Reserve Bank of Boston.

In contrast, U.S. real gross domestic product increased at an annual rate of -0.1 percent in the fourth quarter, according to the Advance Estimate released earlier today by the US Bureau of Economic Analysis. In the first three quarters of 2012, we now estimate that the state's economy grew at revised annual rates of 2.0, 2.6 and 2.9 percent respectively. The U.S. economy grew at annual rates of 2.0, 1.3, and 3.1 percent during the same period.

Over the last year, from the fourth quarter of 2011 to the fourth quarter of 2012, MassBenchmarks estimates that Massachusetts real gross state product grew 2.1 percent, while the U.S. economy grew 1.5 percent. From December 2011 to December 2012, the U.S. Bureau of Labor Statistics estimates that payroll employment in Massachusetts grew 1.6 percent, outpacing the U.S., which reportedly grew 1.4 percent. Official employment revisions are expected in coming weeks and, based on the scale of the revisions experienced in recent years, could significantly alter our understanding of the Commonwealth's economic performance in 2012.  

Based on what we know today, the Commonwealth appears to be poised for faster growth in 2013 according to the MassBenchmarks Leading Economic Index. The Leading Index for December was 3.6 percent, and the three-month average for October through December was 3.5 percent. The leading index is a forecast of the growth in the current index over the next six months, expressed at an annual rate. Thus, it indicates that the economy is expected to grow at an annualized rate of 3.6 percent over the next six months (through June 2013).

Despite a faltering European economy, falling merchandise exports, weak national and international markets for information technology products, and policy uncertainty related to the so-called "fiscal cliff," the state's economy managed to grow moderately in the final quarter of 2012.  If initial state employment estimates hold up following the upcoming "benchmark revisions" process, that strength came primarily from employers who added workers despite these headwinds.  Payroll employment in Massachusetts increased at an estimated 1.6 percent annualized rate in the fourth quarter, following a meager 0.1 percent rate of growth in the third quarter.  

The methodology for the leading index takes no account of looming debates over the extension of the debt ceiling and national budget debates (including sequestration), except to the extent that expectations about spending cuts or other actions are reflected in the indicators that are used to construct the Index.  In this regard, recent employment gains, spending on motor vehicles, and a surging stock market — the Bloomberg stock index for Massachusetts is up nearly 10 percent from the beginning of December (December 3rd through January 23rd) — account for the relatively optimistic outlook.

"There are good reasons to be concerned, however, that our current assessment of economic conditions is too sanguine," noted Dr. Alan Clayton-Matthews, MassBenchmarks Senior Contributing Editor and Associate Professor of Economics and Public Policy at Northeastern University, who compiles and analyzes the Current and Leading indices.  "Wage and salary income, as estimated from state withholding tax receipts, decreased somewhat between the third and fourth quarters, although they were higher than the year before," Clayton-Matthews added.  Spending on items subject to the regular sales and motor vehicle taxes in the fourth quarter grew modestly, edging up 1.1 percent at an annualized rate over the prior quarter.  
      
The 10 indicators that comprise the leading index usually do not all move in tandem. Typically, some may indicate an expectation of faster than average growth, while at the same time others may indicate an expectation of slower than average growth.  The following table accounts for the contributions of each towards faster or slower growth than the long-term trend of 3.2 percent. The index value is their sum.

In December, four indicators contributed to a forecast of above-trend growth: total nonagricultural employment, consumer confidence, the Bloomberg stock index for Massachusetts, and motor vehicle sales taxes. Two indicators contributed to below-trend growth: withholding taxes, and initial unemployment claims. Four indicators contributed to average-trend growth: sales taxes, the unemployment rate, the interest rate spread between 10 year and 3 month U.S. Treasury securities, and construction employment.

In the three-month period October through December, four indicators contributed to a forecast of above-trend growth: total nonagricultural employment, the unemployment rate, the Bloomberg stock index for Massachusetts, and motor vehicle sales taxes. Two indicators contributed to below-trend growth: withholding taxes, and construction employment. Four indicators contributed to average-trend growth: sales taxes, consumer confidence, the interest rate spread between 10 year and 3 month U.S. Treasury securities, and initial unemployment claims.

The current and historical quarterly estimates for state domestic product growth include adjustments for changes in productivity growth. These adjustments are estimates of the quarterly deviations from trend in the growth of the ratio of output to employment and output to wage and salary income. In the fourth quarter, these adjustments subtracted 2.4 percentage points from the annual rate of growth. In the third quarter, these adjustments added 0.5 percentage points to the annual rate of growth. In the second quarter of 2012, these adjustments subtracted 0.6 percentage points from the annual rate of growth.  In the first quarter of 2012, these adjustments subtracted 2.8 percentage points from the annual rate of growth.  For the forecast of state domestic product growth for the first and second quarters of this year, productivity growth is assumed to return to its long-term trend. The methodology and rationale for these adjustments are available from the author upon request.

Several recent months of the indices are revised each release. These revisions are a result of the statistical method used to create the index, as well as revisions in the underlying indicators.  

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All of the indicators except interest rates refer to Massachusetts. The current index is composed of four indicators: nonagricultural employment, withholding taxes, sales taxes, and the unemployment rate. The leading index includes these four current indicators plus the other six (leading) indicators in the contributions table. All of the indicators are as of December, except for interest rates, and the Bloomberg stock index for Massachusetts, which are through January 17. The MassInsight Consumer Confidence Index is released every third month. Intervening months are interpolated, and changes in the Conference Board's Consumer Confidence Index for the U.S. are used to extrapolate to the current month of the index, as needed. Series measured in dollars, i.e., withholding taxes, sales taxes, the Bloomberg stock index, and motor vehicle sales taxes, are deflated by the U.S. consumer price index for all urban consumers, excluding food and energy.

For a description of the methodology used to construct these indices, see: Alan Clayton-Matthews and James H. Stock, "An application of the Stock/Watson index methodology to the Massachusetts economy," Journal of Economic and Social Measurement, vol. 25 (1998/1999), pp. 183-233.


Dr. Alan Clayton-Matthews   
MassBenchmarks
Northeastern University, School of Public Policy and Urban Affairs

January 30, 2013

 

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