Thursday, April 7, 2011
Economic recovery in the Commonwealth continues to be on track. However recent revisions in the official data have somewhat altered our understanding of the recession. The downturn was less severe than first thought, and the recovery less vigorous in its early stages. The net impact of the revisions places the Commonwealth in the same place, but with an altered time path. The downturn was cushioned by the technology sector in the state, which did not experience as great a decline as did the entire economy. And, the technology sector has been at the forefront of the state’s recovery. Massachusetts also has smaller real estate and residential construction sectors than the nation which were at the epicenter of the US recession.
A prominent feature of the recovery has been the rapid increase in labor productivity, especially in its early stages. This is undoubtedly due in part to firm’s efforts to meet growing sales in an uncertain environment with minimal hiring. It is also due to a large measure of the state's growth arising from the high-productivity technology sector.
While rising productivity helps to control costs and make us more competitive, it also means that employment rises more slowly than output. Despite the continuing recovery, the labor market remains anemic. Unemployment remains high in the state and has become a chronic condition for many workers. At the moment, the average duration of an individual worker's unemployment is 38 weeks, in contrast to 9 weeks in the more vibrant year 2000.
Even so, the recovery is now moving ahead, at a pace consistent with the national economic recovery. The latest monthly Massachusetts Current Economic Index for February was up 3.9 percent from January (at annualized rates), and up 3.5 percent from February of last year. The index is constructed to mirror the rate of change of the state's real gross domestic product and these figures are consistent to national economic data.
Future prospects for growth in the state are now being conditioned by a number of factors, most of which originate from outside our borders. China and many other emerging markets have been experiencing very rapid growth that has contributed substantially to global economic expansion. However, this growth has been accompanied by signs of inflation in some cases and the risk is that the central banks in these countries may step on the monetary brakes too hard, dropping one or more of these fast-growth economies into recession. Turmoil in the Middle East, which has recently had the tangible consequence of prompting rising oil prices, is also not at an end, which is creating uncertainty about the future of oil supplies and prices. The European debt crisis, which earlier led to a pause in the US economic recovery, may reemerge. The weaker economies in Europe remain shaky, the stronger economies are pursuing conservative economic policies, and the underlying issues that brought about the earlier crisis have not been fully resolved. The multiple crises in Japan have disrupted global trade and supply chains.
One conditional factor on growth that has a direct connection to Massachusetts is the continuing fiscal pressure being felt by both the state and local governments. State and local governments continue to cut employment even as the Massachusetts economy begins to recover and the worst cutbacks in this sector may not have passed.
Any of these factors, or some combination of them, could alter the course of the national and state economic recovery. If we are lucky and these risks remain at bay, the state is in store for a steady but disappointingly slow recovery. This growth trajectory is probably a “best-case” scenario. If any of these factors, or some combination of them, worsens, then our trajectory will undoubtedly be lower. In either case, job growth and the reduction in long-duration unemployment will remain major challenges in the Commonwealth.
This summary reflects the discussion of the members of the editorial board of MassBenchmarks at its meeting on April 1, 2011. It was prepared by Executive Editor Robert Nakosteen 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 consensus view of the Board regarding the current state of the Massachusetts economy.
MassBenchmarks is the journal of the Massachusetts economy and is published by the UMass Donahue Institute in collaboration with the Federal Reserve Bank of Boston. Its editorial board is made up of leading economic analysts from across Massachusetts. The opinions expressed by the Editorial Board do not necessarily represent the opinions of the Federal Reserve or the University of Massachusetts.
For a list of the members of the MassBenchmarks Editorial Board, please visit: http://www.massbenchmarks.org/about/staff.htm
For more information, please contact:
MassBenchmarks Editorial Board
Michael Best, University of Massachusetts Lowell
For timely and comprehensive analysis of the Massachusetts economy, please visit MassBenchmarks at www.massbenchmarks.org.