Massachusetts Economy Entering Recession
Third Quarter Growth Revised Downward, Tough Times Ahead

The Massachusetts economy grew at an annual rate of 0.2 percent between September and October and was up 1.2 percent from October of last year according to the MassBenchmarks Current Economic Index. The current index is normalized to 100 in July 1987 and is calibrated to grow at the same rate as Massachusetts real gross state product over the 1978–2003 period.  

The MassBenchmarks Leading Economic Index for October was -1.5 percent, and the three-month average for August through October was -1.0 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 contract at an annualized rate of 1.5 percent over the next six months (through April).

“The state’s economy is falling headlong into a recession,” noted MassBenchmarks co-editor and UMass Boston professor, Alan Clayton-Matthews. “October’s real product growth of 0.2 percent is simply a transition from positive but slowing growth in the third quarter to outright declines forthcoming in the current quarter and first quarter of next year,” he added. Real Massachusetts gross domestic product is estimated to have grown by 0.6 percent in the third quarter, a downward revision from last month’s estimate of 1.0 percent. If the economy declines at an annual rate of 1.5 percent over the next six months, as projected by the leading index, then real Massachusetts gross domestic product will fall at annualized rates of 0.4 percent in the fourth quarter, and 1.5 percent in the first quarter of next year.

The decline is broad based among indicators of the state’s economy. Payroll employment fell substantially — by 10,000 — in the past two months while both resident unemployment and initial unemployment claims rose sharply in recent months. Withholding taxes and regular sales taxes (on a seasonally-adjusted and smoothed basis) have been declining in real terms for several months (withholding, since December 2007; and sales, since March 2007); and for the last three months ending in October, each have declined in nominal terms as well. Automobile purchases continue to decline, with motor vehicles sales taxes down 20 percent from a year ago. Since October of last year, the Bloomberg stock index for Massachusetts has fallen almost as much as in the dot.com bust, and in a much shorter period of time. Consumer and business confidence have also fallen sharply.

The housing market continues to weaken as prices continue to fall (down 11 percent in October from a year ago, according to the Massachusetts Association of Realtors), and mortgage foreclosures continue to increase (up 72 percent for the first nine months of this year compared to a year earlier, according to the Warren Group). Sales, although at low levels, have shown some growth in recent months.

Measures of national and international demand for information technology products are turning negative. U.S. investment spending on information processing equipment and software fell in the third quarter, and recent measures of national U.S. production of information processing equipment, computer shipments and orders, North American semiconductor equipment sales and orders, and sales of semiconductors to the Americas, have all declined in recent months. Massachusetts merchandise exports to other countries grew in the third quarter (on a seasonally-adjusted basis), but are no greater than they were at the beginning of this year.

The 10 indicators that comprise the leading index usually do not all move in tandem. Typically, some may indicate an expectation of faster than average growth, while at the same time others may indicate an expectation of slower than average growth. The following table accounts for the contributions of each towards faster or slower growth than the long-term trend of 3.3%. The index value is their sum.

In October, one indicator, the interest rate spread between 10 year and 3 month U.S. Treasury securities, contributed to a forecast of above-trend growth. Eight indicators contributed to below-trend growth: total nonagricultural employment, withholding taxes, sales taxes, the unemployment rate, consumer confidence, the Bloomberg stock index for Massachusetts, initial unemployment claims, and motor vehicle sales taxes. One indicator, construction employment, contributed to average-trend growth.

In the three-month period August through October, one indicator, the interest rate spread between 10 year and 3 month U.S. Treasury securities, contributed to a forecast of above-trend growth. Nine indicators contributed to below-trend growth: total nonagricultural employment, withholding taxes, sales taxes, the unemployment rate, consumer confidence, the Bloomberg stock index for Massachusetts, initial unemployment claims, construction employment, and motor vehicle sales taxes.

Several recent months of the indices are revised each release. These revisions are a result of the statistical method used to create the index, as well as revisions in the underlying indicators.

Alan Clayton-Matthews

November 25, 2008

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