Critics see signs of an overall economic slowdown

Critics see signs of an overall economic slowdown

The Massachusetts Current Economic Index for September was 235.7, down 3.7 percent from August (in annualized rates), and up 3.8 percent from September 2022. The Current Index was normalized to 100 in July 1987, and is calibrated to grow at the same rate as Massachusetts. Real GDP during the period 1978-2022.

In the third quarter of 2023, Massachusetts’ real GDP increased at an annual rate of 3.8 percent, according to MassBenchmarks, while U.S. GDP increased at an annual rate of 4.9 percent, according to the U.S. Bureau of Economic Analysis (BEA). In the second quarter of 2023, Massachusetts’ GDP increased at an annual rate of 3.6 percent according to MassBenchmarks while U.S. GDP increased at an annual rate of 2.1 percent according to BEA.

The strong third quarter was a surprise to economists, who in July had expected growth of less than one percent year-on-year in the third quarter. MassBenchmarks’ estimate for state GDP growth for the third quarter was 0.7 percent, while a Wall Street Journal survey of economists had expected 0.6 percent for the United States. Strong job growth and strong consumer spending in the summer also contributed to the strong growth, as well as additions to inventories. Growth is expected to slow significantly in the fall and winter.

Employment rates rose 1.7% year over year in the third quarter in both Massachusetts and the United States, a notable pace given the Federal Reserve’s efforts to slow the economy. This pace is unlikely to continue in the current quarter. Nationally, payroll growth slowed in October. (State estimates for October will be available later this month.)

In Massachusetts, there appears to be little ability to squeeze more workers from the population. Unemployment rates in the state reached historic lows, reaching 2.6% in September compared to 3.8% in the United States. The broader measure of the under-6 unemployment rate, which counts involuntary part-time workers and people marginally attached to the labor force as unemployed, is just 5.4 percent in Massachusetts, near a historic low. The number of part-time workers who want to work full-time is approximately 25% below the pre-pandemic level, and the number of marginally attached workers is well below pre-pandemic levels. The nation’s labor force participation rates have not returned to pre-pandemic levels, but this does not indicate stagnation or the ability to add new workers; Rather, it reflects the demographic aging of the working-age population. Prime-age workers (25-54 years old) are participating at pre-pandemic rates, but not older workers, as the average age of the over-55 group is rising as the baby boomer generation gets older.

Massachusetts’ income and spending indicators – based on tax revenues – point to some weakness in the state’s economy compared to the United States. While national wage and salary income rose at an annual rate of 5.6 percent in the third quarter according to the BEA, wage and salary income based on state tax revenues rose at a slower annual rate of 3.5 percent in the third quarter.

Spending on items subject to the state’s regular sales tax and automobile sales tax declined significantly in the third quarter, at an annual rate of nearly 25 percent. This is a volatile measure – such tax revenues can fluctuate significantly from one quarter to the next – but change of this magnitude is not common. While most of this spending reflects consumer spending on goods, a large proportion of the amount – perhaps a fifth – reflects corporate spending on taxable goods.

In addition to expectations of slower growth in the current quarter, there is a slow upward trend in the measure of government unemployment claims and the number of first payments. This sharp rise is not indicative of a turning point but is consistent with declining demand for labor or a longer job search for job changers.

Inflation, as measured by the Bureau of Labor Statistics’ headline Consumer Price Index, has been more moderate in the Boston metropolitan area than in the country as a whole. On a quarterly basis, prices in the Boston area rose by 2.2 percent compared to 3.6 percent in the United States in the third quarter. After accounting for food and energy, core prices rose 1.8 percent in Boston versus 2.8 percent in the United States in the third quarter. Compared to Q3 2022, overall prices in the Boston area rose 2.7 percent in Q3 2023, versus 3.6 percent for the US, while core prices rose 3.5 percent in Boston versus 4.4 percent for the US.

Massachusetts’ GDP growth is expected to slow to a 1.9 percent annual rate in the fourth quarter and to a 0.3 percent rate in the first quarter of next year. This slowdown is being driven by leading indicators of auto spending, unemployment claims, stock prices, the 10-year Treasury interest rate spread of less than 3 months (related to the Fed’s interest rate policy), and lackluster consumer confidence. The average forecast for U.S. GDP growth from the Wall Street Journal’s October survey of economists is for 0.9 percent growth in the fourth quarter and 0.4 percent growth in the first quarter of next year.

Current and historical quarterly estimates of state GDP growth include adjustments for changes in productivity growth. These adjustments are estimates of quarterly deviations from the 1978-2022 trend in the growth of the output-to-employment ratio. In the third quarter of 2023, these adjustments added 0.9 percentage points to growth. In the second quarter of 2023, these adjustments subtracted 1.9 percentage points from growth. In the first quarter of 2023, these adjustments subtract 2.5 percentage points from growth. In the fourth quarter of 2023 and the first quarter of 2024, these adjustments are expected to add 0.9 percentage points to growth.

Current and historical quarterly estimates also include “cyclical” adjustments, as the relationship between the growth of current indicators and GDP growth changes over the course of the business cycle. In the third quarter of 2023, these adjustments added 0.9 percentage points to growth. These amendments will be made in the second quarter of 2023
Subtracting 2.7 percentage points from growth. In the first quarter of 2023, these adjustments subtract 0.5 percentage points from growth. In the fourth quarter of 2023 and the first quarter of 2024, these adjustments are expected to add 4.7 and 4.9 percentage points to growth, respectively.

The last several months of the current index are reviewed in each edition. These revisions are a result of the statistical method used to create the index, as well as revisions in the underlying indicators.

All indicators in the current index point to Massachusetts. The current index consists of four indicators: non-farm employment, withholding taxes, sales taxes, and unemployment rate. Withholding taxes and sales taxes are reduced by the US Consumer Price Index for all urban consumers, except food and energy.

For a description of the methodology used to construct this index, see: Alan Clayton-Matthews and James H. Stock, “An application of the Stock/Watson Index Method to the Massachusetts Economy,” Journal of Economic and Social Measurement, Vol. 25 (1998/1999), pp. 183-233.

Alan Clayton Matthews November 6, 2023 MassBenchmarks Associate Professor Emeritus in the School of Public Policy and Urban Affairs and Department of Economics Northeastern University

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