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%, 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% at an annual rate in Massachusetts in the first quarter, slightly higher than the 4.8% 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% below peak (a deficit of 89,000 jobs).
In contrast, the U.S. is now about 1.0% 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, according to the board. 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.