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Friday, January 27, 2017

The Benchmarks Bulletin

State economy appears to slow in the 4th quarter

Expected federal fiscal policy may provide boost in 2017; labor supply a major constraint

Massachusetts real gross domestic product grew at an estimated annual rate of 0.5 percent in the fourth quarter of 2016 according to the MassBenchmarks Current Economic Index. Nationally, real gross domestic product grew at an estimated 1.9 percent during the same period. MassBenchmarks, the journal of the Massachusetts economy, is published by the UMass Donahue Institute in collaboration with the Federal Reserve Bank of Boston. Based on the latest available data, MassBenchmarks now estimates that the state's economy expanded at a 3.1 percent rate in the third quarter. The Bureau of Economic Analysis estimates that the state grew by 1.7 percent in the second quarter, and contracted by 1.9 percent in the first quarter, while the U.S. grew by 3.5 percent in the third quarter, 1.4 percent in the second quarter and 0.8 percent in the first quarter.

Economic growth in Massachusetts appears to have decelerated in the fourth quarter to a more pronounced degree than was the case nationally. This may reflect tighter labor force capacity constraints in the state as unemployment rates are very low, indicating very little slack in the labor market which may be making it difficult for some employers to fill open positions. Wage and salary incomes also appeared to decline in the fourth quarter after experiencing strong growth earlier in the year. Indicators of spending by households and businesses remained strong during the final quarter of 2016.

The unemployment rate for Massachusetts residents declined to 2.8 percent in December from 3.6 percent in September and 4.9 percent one year ago. It is now well below the pre-recession low of 4.6 percent in 2007. Even the state's broader U-6 measure, which includes involuntary part-time workers and those who want a job but haven't searched in the last four weeks is near pre-recession levels. In December, the broadest definition of state unemployment stood at 7.4 percent, close to the prerecession low of 7.1 percent in September 2007.1

These rates are significantly lower than the national headline unemployment rate, which stood at 4.7 percent in December. The national U-6 rate was 9.2 percent in December. While some slack remains, the available labor supply may not be well matched with the requirements of expanding Bay State employers. This may help to explain why payroll employment in Massachusetts grew at a 0.9 percent rate in the fourth quarter after expanding at a 2.4 percent pace in the third. U.S. employment grew 1.4 percent in the fourth quarter and 1.8 percent in the third quarter respectively.

"While wage and salary income declined at a 7.6 percent rate in the fourth quarter, this is surprising but doesn't necessarily indicate falling labor incomes," noted 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 Indexes. This measure is estimated from withholding tax revenues, and can fluctuate from quarter to quarter for many reasons. "One reason for the slowdown in income growth may be strong income growth in the third quarter (11.8 percent) which, according to the Massachusetts Department of Revenue, was affected by one-time business tax events that effectively shifted some income receipts into the third quarter from the fourth quarter," Clayton-Matthews added.

The fourth quarter is also the season for bonuses, and the timing of their receipt can make fourth quarter estimates volatile. With a new administration in Washington D.C. and uncertainties about changes in federal income tax rates, the timing of receipt of bonus payments may have been delayed.

Consumer and business spending on items subject to the state regular sales tax expanded at a 10.3 percent rate in the fourth quarter, after falling at 0.7 percent rate in the third quarter. Sales were strong for both items subject to the regular sales tax and for motor vehicles. Relative to the fourth quarter of 2015, this measure of spending was up 2.2 percent.

The MassBenchmarks Leading Economic Index suggests that the state economy will continue to grow at this subdued pace over the next six months, at 0.9 percent in the first quarter of this year, and 1.0 percent in the second quarter. Aside from effects in stock market prices – which to this date are positive but not large – the leading index is not capturing the expectations of many economists of a fiscal stimulus that may most boost growth later this year or in 2018. Even though there are still worries about Europe and China, slow but steady world economic growth is expected for this year. There are probably more upside than downside risks to the relatively slow outlook suggested by the leading index. However, labor supply constraints will almost certainly become more of a drag on growth as time goes on and the retirements of baby boomers increase.

1.) The U.S. Bureau of Labor Statistics does not release the U-6 monthly at the state level. MassBenchmarks obtains monthly estimates directly from the Current Population Survey. The figures reported here are seasonally-adjusted and smoothed to make them comparable to the monthly U.S. rates.


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. Alan 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 & Public Policy
Northeastern University
(617) 512-6224

Dr. Robert Nakosteen
Executive Editor, MassBenchmarks
Professor of Economics
Isenberg School of Management
University of Massachusetts Amherst
(413) 545-5687


Dr. Michael Goodman
Co-Editor, MassBenchmarks
Executive Director, the Public Policy Center (PPC)
Professor of Public Policy
University of Massachusetts Dartmouth
(617) 823-2770

Dr. Mark Melnik
Senior Managing Editor, MassBenchmarks
Director, Economic and Public Policy Research
University of Massachusetts Donahue Institute