Massachusetts Economy Expands in First Quarter
Innovation Economy Allows Bay State to Buck National Trends

Real Massachusetts gross domestic product is estimated to have grown at a 3.2 percent annual rate in the first quarter of this year, according to the MassBenchmarks Current Economic Index. This is well above the estimated 0.6 percent rate of growth of the U.S. during the same period and slightly faster than the 2.9 percent growth the state experienced in the fourth quarter of 2007. While consumer confidence and stock prices have fallen sharply in recent months, the Current and Leading indices do not suggest that the state’s economy is currently in a recession or will be in the immediate future. However, growth may weaken enough in the coming months to result in moderate declines in payroll employment.

In March, the Massachusetts economy grew at an annual rate of 3.4 percent and was up 3.0 percent from March of last year according to the MassBenchmarks Current Economic Index. The current index is normalized to 100 in July 1987 and is calibrated to grow at the same rate as Massachusetts real gross state product over the 1978–2003 period.

The MassBenchmarks Leading Economic Index for March was 2.5 percent, and the three-month average for January through March was 2.7 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 2.5 percent over the next six months (through September). Because of monthly fluctuations in the data on which the index is based, the three-month average of 2.7 percent may be a more reliable indicator of near-term growth.

Continued expansion in technology, science, knowledge, and health sectors has offset declines in housing and consumer-related sectors such as construction and retail trade, so that total nonagricultural employment has continued to grow, bucking the national trend of declining employment in the last three months. State residential real estate markets have continued to weaken, as evidenced by declining home sales and prices, and large inventories of homes for sale. Non-energy consumer spending, as measured by state use and motor vehicle taxes, is flat, and falling in real terms. AIM’s business confidence index fell below 50 in March, the critical line dividing expectations of expansion versus contraction.

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 3.3%. The index value is their sum.

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

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

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.

Alan Clayton-Matthews

April 22, 2008

» Top