Tuesday, February 26, 2013
The Massachusetts economy experienced a relatively good year in 2012. Payroll employment grew more than its national counterpart, and state gross domestic product growth exceeded national growth as well. We await a forthcoming revision to the employment growth indicator to see if our measure of its positive performance holds up. Looking to the future offers reasons for some cautious optimism despite the threat to the recovery presented by looming fiscal austerity policies set to take effect in March.
On the positive side, the global economy is at an inflection point, which will help stem the drop in state exports and lead, eventually, to a rebound. China has avoided a hard landing and is poised for growth. Europe is likely to have several more quarters of near zero growth; on the upside, it has avoided a breakup of the euro, which would surely disrupt trade and financial transactions. Europe and China are among the state's most important export destinations, so developments in these places have a direct impact here.
The state residential real estate market has firmed and is experiencing modest growth. Employment and gross state product, as mentioned, are expanding (though employment is currently 1.2 percent below its pre-recession peak). Unemployment is considerably lower than nationally, hovering in the range of 6.5 percent in recent months, while the national rate is just below 8 percent. All in all, the state has experienced a reasonably healthy recovery from the recession, and will probably experience modest growth in the coming year, building on this economic momentum.
The uncertainty in forecasting the next year's economic performance arises from major issues at the national level that remain unresolved for now. Most important among these issues is the federal government budget sequester, which consists of large across-the-board budget cuts affecting both defense and nondefense expenditures. The state economy depends disproportionately on sectors of the economy that will be hard hit by these budget cuts. The state's technology sector has important links to Defense Department spending, which will absorb about half of total budget cuts if the sequester stands. Universities here depend on federal research grants from a number of agencies, including the Defense Department, the National Institutes of Health, and the National Science Foundation, among others. The health sector in the state also receives considerable federal funding. All these sources of federal support are in jeopardy, but the extent of the cuts remains unknown and their likely impacts on the Massachusetts economy are hard to predict. Nevertheless, consumer and business confidence will likely continue to decline, which may hinder the spending plans in both sectors.
Overall, our outlook for the coming year is positive. Growth will continue, though modestly. However, as one Board member said, "The economic clouds have parted but not lifted". The recovery has been tepid, with implications for jobs and unemployment. Our economy has shown continued resilience, but we must closely track political and economic developments both in Washington and overseas.
For more information, please contact:
MassBenchmarks Editorial Board
Katharine Bradbury, Federal Reserve Bank of Boston
For timely and comprehensive analysis of the Massachusetts economy, please visit MassBenchmarks at www.massbenchmarks.org.