UMass Donahue Institute
View web version Thursday, September 27, 2012
The Benchmarks Bulletin

Mass Economy Shifting Into "Lower Gear" Declares
MassBenchmarks Editorial Board

Global developments, looming national "fiscal cliff" slowing
state economy leading regional economists report

After an extended period of faster-than-national growth, the Massachusetts economy appears to have dropped into a lower gear. Growth is slowing and is projected by the MassBenchmarks Leading Economic Index to continue doing so. Deteriorating global economic conditions finally appear to be taking their toll on the state's innovation sector, which has been a growth driver for the Commonwealth in recent years. A series of economic "headwinds" poses serious risks to the sustainability of the state and national recoveries, and there is considerable economic uncertainty both across the Commonwealth and the nation.

Sales of silicon computer chips, a good proxy for the information technology sector, are down worldwide. U.S. firms' investment in information and processing equipment and software has been essentially stagnant in the first two quarters of this year. Massachusetts merchandise exports, which include the state's IT products, are down from last year. To date, the softening in worldwide demand for IT products and services appears not to have made a dent in Massachusetts jobs. Instead, employment losses in the past few months have been concentrated in construction, retail trade, non-technical business services, leisure and hospitality, and private education, reflective of weak demand from both households and businesses. Apart from IT, other segments of the state's innovation economy appear to remain strong, especially in life sciences.

The national slowdown is due to at least three economic headwinds: a wealth effect, whereby contracting household balance sheets and the diminished value of financial and real estate assets have discouraged consumer spending; a housing sector that until very recently has stubbornly resisted recovery; and ongoing fiscal drag, mainly from continuing layoffs in the state and local government sector. Among these factors, only housing seems to be beginning to rise, both nationally and in Massachusetts, as both prices and sales seem to be firming and even turning around. It is hard to envision a genuine economic expansion without a recovery in this vital sector, so this is a beneficial change.

Looking ahead, the potential for simultaneous and precipitous federal tax increases and expenditure cuts, popularly known as the fiscal cliff, loom at the end of this year. While there is wide agreement that the impact of the nation jumping off this "cliff" would have serious negative economic consequences — the non-partisan Congressional Budget Office has estimated a national recession would result — there is little indication that our political institutions are capable of doing what is necessary to avoid this outcome. As one Board member commented, "When you begin an economic discussion and end up with a political discussion you have a problem."

The impact of slowing growth in China and outright recession in key parts of Europe can be seen in the slowing of trade between Massachusetts and these regions, which represent important export markets for the Commonwealth and whose demand for the Bay State's medical and technology products and professional and business services has played big part in the state's economic success in recent years.

As the third quarter of 2012 comes to a close, the slowdown in national and global growth is clearly taking its toll on the state economy. Going forward the near-term risks to the state economy appear mostly skewed to the downside. The Federal Reserve Open Market Committee mitigated one source of uncertainty by explicitly stating that it expects to remain committed to a highly accommodative monetary policy at least through mid-2015. This announcement notwithstanding, our economic fate depends also on the actions of other key policy makers, and the stakes of the decisions they make in coming months are high indeed. While we do not anticipate a return to economic recession in Massachusetts in coming months, we have the urgent hope that our national political institutions can muster the will to address the serious fiscal and economic issues that threaten the state and national economies and successfully navigate the treacherous path that lies ahead.


This summary reflects the discussion of the members of the editorial board of MassBenchmarks at its meeting on September 21, 2012. 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:

For more information please contact:

Robert Nakosteen
Executive Editor, MassBenchmarks,
and Professor of Economics,
UMass Amherst
(413) 545-5687

Dr. Michael Goodman
Co-Editor, MassBenchmarks
Associate Professor of Public Policy
UMass Dartmouth
(617) 823-2770


Yolanda Kodrzycki
Co-Editor, MassBenchmarks
Vice President, Federal Reserve
Bank of Boston
(617) 973-3809

Alan Clayton-Matthews
Senior Contributing Editor, MassBenchmarks
Associate Professor of Public Policy
and Economics
Northeastern University
(617) 512-6224

MassBenchmarks Editorial Board

Katharine Bradbury Federal Reserve Bank of Boston
Frederick Breimyer Federal Deposit Insurance Corporation
Karl Case Wellesley College
Peter Doeringer Boston University
Robert Forrant University of Massachusetts Lowell
Frank Levy Massachusetts Institute of Technology
Christopher Probyn State Street Bank
Jim Stock Harvard University
Andrew Sum Northeastern University
David Terkla University of Massachusetts Boston
Paul Willen Federal Reserve Bank of Boston

For timely and comprehensive analysis of the Massachusetts economy, please visit MassBenchmarks at