UMass Journal Reports US Outperforms State
Some positive indicators are seen; state’s economy is stronger than numbers indicate

Economic activity in Massachusetts is estimated to have declined at a 0.2 percent annualized rate in the fourth quarter of 2009, according to the MassBenchmarks Current Economic Index. The U.S. Bureau of Economic Analysis reported today that the national economy expanded markedly at an estimated annual rate of 5.7 percent during the same period.

“The difference between the state growth and the US GDP is exaggerated because state growth is being understated by technical issues in the measurement. Even though the Index number may understate the strength of the Massachusetts economy, the state economy continues to struggle from the recession,” noted Robert Nakosteen, Executive Editor of MassBenchmarks and Professor of Economics at the Isenberg School of Management at UMass Amherst. “More optimistically,” he added, “the prospects for the future as measured by the Leading Index, look brighter.”

The MassBenchmarks Current Economic Index for December was 164.1, down 0.1 percent from November (at annual rates), and down 1.3 percent from December of last year. The current index is normalized to 100 in July 1987 and is calibrated to grow at the same rate as Massachusetts real gross domestic product over the 1978-2003 period.

The MassBenchmarks Leading Economic Index for December was 1.1 percent, and the three-month average for October through December was 0.5 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 1.1 percent over the next six months (through June).

“The disappointing fourth quarter performance was due to a poor holiday spending season reflected in December employment and state withholding sales tax revenues, and a sharp rise in the December unemployment rate,” said Alan Clayton-Matthews, MassBenchmarks Senior Contributing Editor and Associate Professor of Public Policy and Urban Affairs at Northeastern University.  “This shock was most likely a one-time event that does not indicate weakness going forward – the leading index is projecting growth in the first quarter of this year.”  He further added, “The point is that the state’s economy is stronger than the December and fourth quarter gross state product estimates indicate.  Exports are rising, technology product and labor markets are growing, layoffs are subsiding, and home sales and prices are rising.”

Real gross state domestic product, as estimated by the Massachusetts Current Economic Index, declined at an annual rate of 0.2 percent in the fourth quarter, in contrast to U.S. real GDP growth of 5.7 percent in the fourth quarter.  The state’s economy is estimated to have declined at a 4.3 percent annual rate in the first quarter, a 1.9 percent annual rate in the second quarter, and a 0.6 annual percent rate in the third quarter, versus corresponding rates of decline for the U.S. of 6.4 percent in the first quarter, 0.7 percent in the second quarter, and growth of 2.2 percent in the third quarter.

If the monthly annualized rate of growth continues at 1.1 percent in January through June, as projected by the leading index for December, then the state’s real gross domestic product will grow at an annualized rate of 0.7 percent in the first quarter and 1.1 percent in the second quarter of this year.

The magnitude of the employment and spending declines in December were probably overstated because they did not fit the normal seasonal pattern.  For example, in December the retail trade sector added 3,000 jobs, but if hiring followed the normal seasonal pattern, there would have been 6,300 jobs added instead.  Therefore, the seasonally-adjusted employment in retail trade fell by 3,300 jobs, even though more people were employed in retail trade in December than in November.

Similarly, wage and salary earning are typically higher in December — by 15 percent over a typical month — due to higher retail employment and bonuses received at the end of the year.  Although withholding taxes were substantially higher in December than in November, they were less high than would have been expected with a normal holiday shopping and bonus season.  As a result, on a seasonally-adjusted basis, they were lower in December than in November.

Also, in contrast to the U.S. GDP estimate, the methodology for state gross domestic product estimates reported here does not incorporate the extraordinarily high productivity growth experienced in this recession.  The result is that the difference between the U.S. and Massachusetts growth rates in this report is most likely overstated.

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

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

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 unemployment, 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 September, except for interest rates, and the Bloomberg stock index for Massachusetts, which are through October 16. 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 with 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.

Alan Clayton-Matthews

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