UMass Donahue Institute
View as a webpage Wednesday, July 31, 2013
The Benchmarks Bulletin

State Economy Slows Significantly in the 2nd Quarter,
UMass Journal reports

Federal austerity policies restraining the Bay State's economic recovery

Massachusetts real gross domestic product grew at an annual rate of 0.8 percent in the second quarter of 2013 according to the latest MassBenchmarks Current Economic Index, released today by MassBenchmarks, the journal of the Massachusetts economy published by the UMass Donahue Institute in collaboration with the Federal Reserve Bank of Boston.

In contrast, U.S. real gross domestic product grew at an annual rate of 1.7 percent. In the first quarter of this year, Massachusetts real gross domestic product grew at an annual rate of 2.8 percent versus U.S. growth of 1.1 percent.

Economic growth in Massachusetts slowed sharply in the second quarter as compared to the first quarter. While fundamental measures of state growth — employment, earnings, and spending — soared in the first quarter, they fell back markedly in the second quarter. State payroll employment grew at an annual rate of 3.0 percent in the first quarter, but stalled in the second quarter, declining by 0.1 percent on an annualized basis. Massachusetts wage and salary income, which increased at an annual rate of 19.8 percent in the first quarter, fell at a 6.9 percent annual rate in the second quarter. Spending on items subject to the state's regular sales tax and the motor vehicle sales tax, which experienced robust growth (expanding at an annual rate of 11.8 percent in the first quarter), increased at a more modest 2.0 percent annualized rate in the second quarter.

A slowdown in the second quarter was not unexpected. Fiscal austerity in the form of the expiration of the 2 percent payroll tax holiday and the federal budget cuts associated with sequestration were expected to impact state growth in the second quarter. Massachusetts, which is heavily reliant on federal funds to support its research and development at the Bay State's world-class hospitals, universities and innovation sectors, and a myriad of defense and other government contractors, appears to be bearing its disproportionate fair share of the impact of these policy choices.

"The recent rise in unemployment is particularly disconcerting," noted Dr. Alan Clayton-Matthews, MassBenchmarks Senior Contributing Editor and Associate Professor of Economics and Public Policy at Northeastern University, who compiles and analyzes the Current and Leading indices. The proportion of the state's labor force that was unemployed rose from 6.4 percent in March to 7.0 percent in June. "It appears that unemployment rates increased for both men and women, and these increases were concentrated among youth — those less than 25 years old, and those with less than a high school education. However, unemployment rates also rose for those between the ages of 25 and 54, and for those with a high school diploma and some college but less than a Bachelor's degree," Clayton-Matthews added.

The MassBenchmarks Leading Economic Index for June was 3.1 percent, and the three-month average for April through June was 3.2 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 3.1 percent over the next six months (through December 2013). This implies the Commonwealth can expect third quarter growth of 2.8 percent, rising to 3.1 percent in the fourth quarter. Significantly, the Leading Index is not able to systematically consider the restraining effects on growth that slowed the state economy in the second quarter and consequently its predictions may be a bit rosy in the current environment.

While a rising stock market, the recovering housing market, long-awaited improvements in household balance sheets, and expected growth in global technology markets all bode well for growth prospects in the second half of 2013, it does not appear likely that federal budget policies will change during this same period. Consequently, it remains unclear as to whether the positive push represented by those factors driving state growth will be able to overcome the counterproductive pull of federal policy in the months to come.

MassBenchmarks is published by the University of Massachusetts Donahue Institute in cooperation with the Federal Reserve Bank of Boston. The Donahue Institute is the public service, outreach, and economic development unit of the University of Massachusetts Office of the President. The current and leading indexes are compiled and analyzed by Dr. Clayton-Matthews, Associate Professor of Economics and Public Policy at Northeastern University and released quarterly by MassBenchmarks.

For a full breakdown of the latest indexes, click here. A comprehensive analysis of the state of the Massachusetts economy can be found in the most recent issue of MassBenchmarks.

For more information please contact:

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

Dr. Robert Nakosteen
Executive Editor, MassBenchmarks,
and Senior Research Faculty Advisor,
UMass Donahue Institute
Professor of Economics and Statistics
Isenberg School of Management
University of Massachusetts Amherst
(413) 545-5687


Dr. Michael Goodman
Co-Editor, MassBenchmarks
Associate Professor of Public Policy and Chair
Department of Public Policy
University of Massachusetts Dartmouth
(617) 823-2770


Mr. Daniel Hodge
Managing Editor, MassBenchmarks
Director, Economic and Public Policy Research
University of Massachusetts Donahue Institute
(413) 577-2393

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