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The most recent MassBenchmarks Board meeting showed a lapse in the economic recovery, as factors including the labor market, inflation, the Omicron variant, and the Ukraine conflict have fomented uncertainties. As a result, although Massachusetts continues to outperform the U.S. economy by most measures, there has been a notable slowdown in economic activity. In the first quarter of 2022, following six straight quarters of growth, both Massachusetts’ real gross state product and national real gross domestic product (GDP) saw reversals, declining by 1.0 and 1.4 percent at annual rates, respectively. This is a stark contrast to the last quarter of 2021 when annualized growth rates were 7.8 and 6.9 percent, respectively, according to the U.S. Bureau of Economic Analysis (BEA).
In contrast to GDP, payroll employment in Massachusetts maintained its forward momentum and actually accelerated in the first quarter of 2022. Payroll employment, for example, increased at both the state and national levels, up 5.2 percent at an annual rate in Massachusetts in the first quarter, slightly higher than the 4.8 percent rate for the U.S. However, because Massachusetts experienced some of the most severe job losses and dramatic increases in unemployment rates in the nation during the early stages of the pandemic in 2020, employment remains 2.4 percent below peak (a deficit of 89,000 jobs). In contrast, the U.S. is now about 1.0 percent below its February 2020 jobs peak, according to the U.S. Bureau of Labor Statistics. The divergence of GDP and employment growth trends during the first quarter indicates a large decline in productivity — more people are working but output is decreasing. The productivity decline could be driven by the fact that low-wage sectors (with below-average productivity) are currently leading job growth, and/or by other factors such as supply constraints that are limiting production, and labor hoarding. The latter possibility is consistent with the historically low level of layoffs.
In terms of GDP growth, Massachusetts and other states have followed national trends more closely than in previous business cycles. This is likely due to both regional economies becoming more diversified over time as industries are less localized as well as the pandemic having a large economic impact on all states. For example, COVID-related stimulus spending is promoting greater convergence among the states in general — allowing most to ride the same wave towards fiscal recovery. As such, the national economic situation, including its endemic risks, have a great bearing on the Massachusetts economy.
This led the Board to spend more time discussing national factors, namely inflation, rising interest rates, and the likelihood of recession when considering risks to the Massachusetts economy, compared to previous meetings. Inflation is very high in both the nation and the state. Year-over-year, consumer price index inflation (CPI-U) for the U.S. was 8.5 percent in March 2022, and has been hovering close to 40-year highs. Over-the-year to March, the CPI inflation rate for Boston was 7.3 percent and 8.5 percent for the U.S. Post-meeting, the U.S. inflation rate declined slightly to 8.3 percent on a year-over-year basis to April, a move that may or may not signal a sustained decline moving forward. Consistent with recent statements from the Federal Reserve, a Wall Street Journal survey of economists (April 1-5, 2022) shows about half expecting two 50 basis point increases in interest rates over the course of 2022. The same survey also indicates that economists are seeing a 28 percent probability of recession within the next 12 months (note that the fear of recession has been rising since the Board met). Further corroborating the risk of recession, the Federal Reserve’s Federal Open Market Committee (FOMC) is projecting slower economic growth in coming years, with uncertainties in their projections rising and more heavily weighted towards the downside. The Federal Reserve is essentially walking a tight rope as it raises interest rates to contain inflation while simultaneously trying to ward off the possibility of a recession. The combination of rising interest rates, recession risk, inflation, and supply chain challenges have joined to upset the stock market, which is now coming down from a peak reached in early 2022. NASDAQ and Bloomberg indices of Massachusetts’ companies show them similarly tracking down.
Longer-term, demographic headwinds now being faced by Massachusetts are raising serious concerns. After growing at a similar pace with the U.S. between the 2010 and 2020 Census counts, Massachusetts’ population declined between 2020 and 2021, an inauspicious beginning to the new decade. Due to COVID-related deaths and lower fertility, Massachusetts actually saw no natural increase in population (i.e., deaths exceed births). This was compounded by increases in net domestic out-migration (more people leaving for other states than coming in) and the continued decline in international immigration — historically, a major generator of labor force growth for Massachusetts. The lack of population growth is constraining labor force growth which, in turn, will make it more challenging for the state to fill jobs. COVID has affected all components of population growth in Massachusetts (with immigration being further slowed by policies initiated by the previous presidential administration), and it remains to be seen how the state’s population dynamic will look going forward. An important question brought up by the Board is whether the particularly sharp drop in the urban core (i.e., Suffolk County) population is a shorter-term blip or if people who had moved to other locations, enabled by work-from-home technologies, will return to the city. A key question is how much reduced immigration will restrain growth in the Massachusetts economy moving forward, given the historical importance of such immigration in supporting labor force growth, entrepreneurship, and high-tech industries in the state. From a policy perspective, immigration may be Massachusetts’ greatest opportunity to grow the labor force, especially as compared to reversing recent negative trends in the natural increase and domestic migration.
With the enduring pandemic, inflation fears, a stock market in decline, and an unstable global geopolitical landscape, a marked increase in uncertainty defines the immediate outlook for the state and national economy. While Massachusetts’ job numbers show an economy nearing a full-recovery from the COVID-19 recession, GDP for both the nation and the state have recently registered a decline. In coming months, it remains to be seen whether the Federal Reserve can put the brakes on inflation without triggering some kind of a downturn.
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