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A program of the Economic and Public Policy Research Group at the UMass Donahue Institute
in collaboration with the Federal Reserve Bank of Boston

Notes from the Board

State Economy poised for expansion declares MassBenchmarks Editorial Board

Sequestration a major threat to state economic growth leading regional economists report.

The Massachusetts economy experienced a relatively good year in 2012. Payroll employment grew more than its national counterpart, and state gross domestic product growth exceeded national growth as well. We await a forthcoming revision to the employment growth indicator to see if our measure of its positive performance holds up. Looking to the future offers reasons for some cautious optimism despite the threat to the recovery presented by looming fiscal austerity policies set to take effect in March.

On the positive side, the global economy is at an inflection point, which will help stem the drop in state exports and lead, eventually, to a rebound. China has avoided a hard landing and is poised for growth. Europe is likely to have several more quarters of near zero growth; on the upside, it has avoided a breakup of the euro, which would surely disrupt trade and financial transactions. Europe and China are among the state's most important export destinations, so developments in these places have a direct impact here.

The state residential real estate market has firmed and is experiencing modest growth. Employment and gross state product, as mentioned, are expanding (though employment is currently 1.2 percent below its pre-recession peak). Unemployment is considerably lower than nationally, hovering in the range of 6.5 percent in recent months, while the national rate is just below 8 percent. All in all, the state has experienced a reasonably healthy recovery from the recession, and will probably experience modest growth in the coming year, building on this economic momentum.

The uncertainty in forecasting the next year's economic performance arises from major issues at the national level that remain unresolved for now. Most important among these issues is the federal government budget sequester, which consists of large across-the-board budget cuts affecting both defense and nondefense expenditures. The state economy depends disproportionately on sectors of the economy that will be hard hit by these budget cuts. The state's technology sector has important links to Defense Department spending, which will absorb about half of total budget cuts if the sequester stands. Universities here depend on federal research grants from a number of agencies, including the Defense Department, the National Institutes of Health, and the National Science Foundation, among others. The health sector in the state also receives considerable federal funding. All these sources of federal support are in jeopardy, but the extent of the cuts remains unknown and their likely impacts on the Massachusetts economy are hard to predict. Nevertheless, consumer and business confidence will likely continue to decline, which may hinder the spending plans in both sectors.

Overall, our outlook for the coming year is positive. Growth will continue, though modestly. However, as one Board member said, "The economic clouds have parted but not lifted". The recovery has been tepid, with implications for jobs and unemployment. Our economy has shown continued resilience, but we must closely track political and economic developments both in Washington and overseas.

This summary reflects the discussion of the members of the Editorial Board of MassBenchmarks at its meeting on February 15, 2013. It was prepared by Executive Editor Robert Nakosteen and was reviewed and edited by the members of the Editorial Board. While discussion among the Board members was spirited and individual Board members hold a wide variety of views on current economic conditions, this summary reflects the consensus view of the Board regarding the current state of the Massachusetts economy.

MassBenchmarks is the journal of the Massachusetts economy and is published by the UMass Donahue Institute in collaboration with the Federal Reserve Bank of Boston. Its editorial board is made up of leading economic analysts from across Massachusetts. The opinions expressed by the Editorial Board do not necessarily represent the opinions of the Federal Reserve or the University of Massachusetts.

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