Excerpts from the Board | Economic Currents | Measure of Massachusetts Data
STATE'S ECONOMY POSTS STRONGEST ANNUAL GAINS SINCE 2001
Science and tech sector boosts employment and income
A MILD SLOWDOWN FORECAST FOR WINTER AS HOUSING SALES DIP AND
ENERGY PRICES STAY HIGH.
The Massachusetts economy posted its strongest year of growth since the recession began in 2001. Demand for the state’s technology and science-based goods and services lifted labor markets and workers’ earnings. These strengths were enough to offset weak consumer spending hurt by high energy prices and a rapidly slowing housing market. The Massachusetts leading index forecasts a mild slowdown in growth through the fall and winter. The most recently available data are already consistent with that projection, although it is too early to tell by how much the speed of the expansion will decelerate.
A Business-Led Expansion
According to the Current Economic Index for Massachusetts, gross state product grew by 3.4 percent in the year ending in September, outpacing U.S. gross domestic product growth of 2.9 percent over the last four quarters. Growth was steady throughout the year, ranging from a 2.9 percent rate in the fourth quarter of 2005, to a 3.6 percent rate in the second quarter of this year. Last quarter, gross state product is estimated to have grown by 3.4 percent, versus 1.6 percent for the nation. 1
Domestic and worldwide demand for the state’s technology products has been strong, with growth in most markets over the last year expanding at double digit rates. This pace of demand growth continued in the third quarter. Two measures most closely related to Massachusetts performance are indicative of this strength. Massachusetts merchandise exports expanded by 24 percent between August of last year and this August. In the most recent three-month period ending in August, the annual rate of export growth accelerated to 45 percent over the prior three-month period. Meanwhile, the Bloomberg stock index for Massachusetts expanded by 14.5 percent in the year ending October 31, and is up 51 percent (at annual rates) from July 30. Business confidence, as measured by The Associated Industries of Massachusetts (A.I.M.) index, at 57.0 in September, remains well in expansion territory (i.e., above 50), and is also stronger than the corresponding national index of the National Association of Purchasing Managers, whose manufacturing index stood at 52.9 in September.
View Figure - Growth in Key Product Markets Indicators Figure
Labor Markets Continue to Improve
Improving business conditions are making their impact on labor markets. The pace of payroll employment growth in Massachusetts picked up significantly, expanding by 1.0 percent between September of 2005 and this September. Although this rate of net job creation is well below the expansion pace of the 1990s, which witnessed average annual payroll employment growth of 2.2 percent, it is twice the rate at which jobs had been expanding between December 2003, the employment trough, and last September 2005.
The household survey of the state’s residents is also indicating strength in recent months. Although growth rates in the survey’s resident employment and labor force in the year ending in September were weaker than that of the payroll survey – resident employment grew by only 0.3 percent and the labor force and the labor force by 0.7 percent – both resident employment and the labor force have risen in four of the last five months. The working age population is also rising once again, albeit very slowly, after remaining stagnant between mid 2003 and mid 2005.
Unemployment is also improving, even though the headline state unemployment rate rose from 4.8 percent to 5.1 percent in the year ending in September. Statewide initial unemployment claims remains in the low 30 thousands, indicative of an improving labor market. The average for the last twelve months ending in September was 31,600, about 5 percent below the average of the preceding twelve month period.
Even more significant is the continuing drop in long term unemployment. The proportion of the working age population (15 years of age and older) who have been unemployed 27 weeks or longer averaged 0.55 percent in the first nine months of this year, about the same as the national rate of 0.56 percent. This ratio has fallen steadily during the recovery, with long term unemployment falling at a rate of roughly 20 percent per year since 2003. The number of long term unemployed has fallen by about 50 percent from the 2003 average. Average unemployment duration during the first nine months of this year was 15.4 weeks, down from an average of 20.2 weeks for all of 2005.
View Figure - Long Term Unemployment as a Percent of the Population Over 14 Years Old
Improving labor markets have boosted workers’ earnings. State withholding taxes suggest that aggregate wage and salary payments in Massachusetts grew by 4.6 percent in the last twelve months ending in September. This represents an average annual wage gain of 3.6 percent per worker, about 1.6 percent in real terms after deflating by the rise in consumer prices.
Housing Market Troubles
A substantial correction in the housing market is now underway, with falling prices and pressure for continued price declines. Inventories are up, sales are down, and the new construction pipeline is dwindling.
The two most widely used indicators of house prices, HUD’s Office of Federal Housing Enterprise Oversight (OFHEO) housing price index and the Massachusetts Association of Realtors’ (MAR) median house price, are both in agreement that prices are falling.
View Figure - Median House Price Line
HUD’s index has prices turning down beginning in the second quarter of this year, at an annual rate of 1.7 percent. As the federal agency’s own analysis suggests, however, their index may be overstating appreciation rates in New England by about 3.7 percentage points, suggesting that the decline began in the first quarter and was continuing downward at about a 5.4 percent annual rate in the second quarter of this year. 2
The MAR median price series for single family homes fell 5.3 percent in the year ending in September, while condominium prices in September were unchanged from the prior year. There is substantial market pressure for further price declines. Sales in September were 24 percent lower than the year before for single family homes, and 28 percent lower for condominiums. On a seasonally adjusted basis, sales of single family homes have been falling since mid 2004, and sales of condominiums have been falling since mid 2005. As sales have fallen, inventories have risen. Since the end of 2004, the number of active listings for single family homes rose 47 percent on a seasonally adjusted basis, while the corresponding figure for condominiums rose 67 percent.
View Figure - Active Listings, Single Family
These market signals are putting a brake on housing starts. Single family housing permits in May through September (on a seasonally adjusted basis) were down 27 percent from the 2005 monthly average. Construction employment, buoyed by strong activity in the commercial sector, has not felt the hit of the housing slowdown yet. So far, it is off only 2,200 jobs (1.5 percent) from its peak in January. But as the residential pipeline flow drains to a lower level of new construction, employment losses in construction will begin to accumulate.
Is the Brain Drain Turning Into a Brain Gain?
The retreat in house prices does not reflect an underlying weakness in the economy, but rather a deflation of a bubble in house prices and a return to a more reasonable relationship between housing prices and incomes. According to OFHEO, since 1980 housing prices rose faster in Massachusetts than in any other state in the nation. Why Massachusetts? Because of the success of the state’s transformation to a highly educated, high-tech economy. The key to this transformation was the state’s higher education institutions, which drew students from around the country and world to Massachusetts. Many of these students stayed, increasing the educational attainment of this state faster than any other in the nation. From 1960 through 2000, the state experienced a great “brain gain”.
View Figure - Number of Migrants To/From Massachusetts Who Are Either
in College or Who Have a Bachelor's or Higher Degree
During the last two severe recessions, however, the brain gain turned into a brain drain as people moved out of Massachusetts in search of better job opportunities and – particularly during the last several years – more affordable housing. Young workers and the highly educated are the most mobile groups in the population, and so are the most affected by the geographic push and pull of jobs and the cost of living.
In the 1990s, the expansion ultimately restored the net inflow of both overall population and “brains”. Is the current expansion once again restoring the net flow of highly educated persons back into the state? The answer appears to be a qualified yes. In an earlier issue of MassBenchmarks using the American Community Surveys for 2003 and 2004, this author found that, in the two-year period between April 2002 and April 2004, there was a net migration outflow from the state of 22,500 persons who were either college students or who had a bachelor’s or higher college degree. 3 The 2005 American Community Survey records a very modest reversal of that “brain drain.” Between April 2004 and April 2005, the survey counted a net migration inflow of 4,900 persons who were either college students or who had a bachelor’s or higher degree. These net flows were composed of gross flows of 77,000 persons who either came into Massachusetts from other states or countries to attend Massachusetts colleges (27,000), or who came into the state with a BA or higher degree (50,000), and 72,100 Massachusetts residents who left either to attend colleges in other states (19,200), or who moved to other states with a BA or higher degree (52,900).
There are several reasons why this finding is a qualified “yes” rather than a definitive finding of a return to a brain gain. One is that, since this is a survey rather than a complete census, it is subject to sampling variation. This is approximately a one percent sample, with a standard error for the gross migration flows into or out of the state of approximately 3,600 persons, and a standard error of roughly 5,000 for net migration. Thus, there is a reasonable probability (but substantially less than 50 percent) that the actual net migration flow of “brains” during this period was negative rather than positive.
Second, the survey does not measure migration from Massachusetts to foreign countries. To the extent that Massachusetts college students studied abroad or Massachusetts college-educated residents moved abroad, the survey is undercounting out migration of “brains.”
Third, the survey does not include group quarters residences: that is, college dormitories. This omission leads to an under count of the net in migration of “brains.” To see how this happens, consider a situation where two students from Kansas come to Boston to go to college, and stay in a college dormitory. After graduation, one student stays in Massachusetts and the other returns to Kansas (or goes to North Carolina). The survey would miss both students’ in migration to the state, and would count one out migration, for a net out migration of one “brain,” when, in fact, there actually was a net in migration of one “brain.”
So, in the final analysis, one cannot be sure whether or not the brain drain has actually reversed itself. The trend from 2002 to 2005, however, given by the American Community Survey, is clear. If the brain drain has not reversed into a brain gain, at least the drain has slowed substantially.
Slower Growth Ahead is Likely
The Leading Index is forecasting a moderate slow down in growth for the Massachusetts economy. This is consistent with the expectation of a slowdown at the national level by most economists, and is also consistent with the most recent indicators of several key product markets. The principal drag on the economy is through the housing market. Declines in construction activity, residential household wealth, and spending on consumer durables like furniture are expected to impact employment and consumer spending in the short term.
Several key product market indicators have also turned negative in the most recent month of reporting, including Massachusetts merchandise exports, computer shipments, semiconductor equipment billings and bookings, and semiconductor sales to the Americas. Most of these indicators are volatile, so a one-month change in one or two is not usually significant. However, the number of indicators that have turned negative may be a sign that the demand for technology products has peaked again. Demand and production for products like semiconductors and semiconductor equipment exhibit frequent cycles of relatively short duration compared to the overall business cycle, and it is possible that some markets are beginning a contraction phase. If this is the case, the slowdown may soon turn out to be more pronounced than the Leading Index is now projecting. The severity of the housing market downturn, both nationally and locally, is also a wildcard with significant downside risk.
Alan Clayton-Matthews November 6, 2006
ALAN CLAYTON-MATTHEWS is an associate professor and director of quantitative methods in the Public Policy Program at the University of Massachusetts Boston and is co-editor of this journal.
1 The gross state product and U.S. gross domestic product estimation methodologies are quite different, and so are not strictly comparable. Unlike the national product estimate, the Current Economic Index does not measure investment. A sharp fall in residential investment is estimated to have lowered third quarter GDP growth by a full percentage point, which would account for most of the difference between the state and national product growth performance measures over the last year.
2 In its June release, OFHEO analyzed the difference between its “HPI” index – the one referred to in the text, and one calculated on purchases only, and reported the differences by region. In New England, the purchase-only index grew by 3.7 percentage points less than the full HPI index during the year ending the first quarter of 2006. OFHEO attributes the difference to a selection problem caused by including cash-out refinances in its HPI index. These houses, which represented half of the sample in first quarter of 2006, are “disproportionately those that have experienced the most appreciation”, according to OFHEO. See OFHEO’s press release, “House Price Increases Continue; Some Deceleration Evident”, June 1, 2006, Office of Federal Housing Enterprise Oversight, pp. 6-9.
3 “Economic Currents”, Mass Benchmarks, Volume 8, Issue 1, 2006, p. 9.