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AMHERST — In the second quarter of 2022, Massachusetts real gross domestic product decreased at a 0.2% annualized rate, according to MassBenchmarks, while U.S. GDP decreased at a 0.9% rate, according to the U.S. Bureau of Economic Analysis (BEA). In the first quarter of this year, according to the BEA, Massachusetts GDP grew at an annual rate of 0.2% while U.S. GDP declined at an annual rate of 1.6%.

“Economic growth in both the U.S. and Massachusetts slowed very significantly in the first half of this year despite a strong labor market with good employment gains, a low unemployment rate, and a surplus of job openings,” noted Alan Clayton-Matthews, senior contributing editor and professor emeritus of Economics and Public Policy at Northeastern University, who compiles and analyzes the current and leading indices for MassBenchmarks.

According to Clayton-Matthews, the apparent paradox described above can be explained by several conditions that are shared by both the nation and the state that have resulted in lower productivity per worker. First, job growth has been concentrated in relatively lower-paid sectors, such as leisure and hospitality, that tend to employ lower-skilled workers. Second, as a response to the scarcity of labor in high-demand fields, employers have been ‘labor hoarding’ or holding on to workers despite slowdowns in demand and lower utilization of employees. As a third factor, COVID-19 has increased absences from work, whether for illness or care of a sick family member.

Inflation is also playing a role. Per-worker wages and salaries are not keeping up with inflation, and on average are falling in real terms. Total personal incomes, though rising, are just barely keeping up with inflation. This limits real consumer spending, which accounts for approximately two-thirds of all economic activity. Finally, rising interest rates are slowing the economy, reducing the demand for residential construction, and lowering asset prices, with predictable indirect effects on consumer and business confidence, which can be expected to dampen current and future spending.

The outlook for the rest of the year is for slow growth, but the level of uncertainty remains high. MassBenchmarks estimates the annualized rate of real GDP growth for Massachusetts will be 1.0% in the third quarter and 2.0% in the fourth quarter. The mean forecast from the July Wall Street Journal survey of economists for the U.S. is 1.5%in the third quarter and 1.1% in the fourth quarter. Measures of consumer confidence and business confidence — for example, from the Conference Board for the U.S. and from the Associated Industries of Massachusetts for Massachusetts businesses — are falling, and various surveys of economists put the probability of a U.S. recession in the next 12 months at roughly 50%.

Daily News

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. 

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