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 approaching "full capacity" declares MassBenchmarks editorial board

Policy uncertainty and global economic weakness weighing on the state's economic outlook.

The Massachusetts economy is fast approaching full capacity. The state unemployment rate has fallen to below 3 percent, and is certainly lower in the metro Boston area. These tight labor market conditions could lead to worker shortages in certain occupations now or in the near future. Based on anecdotal reports from selected employers, wages appear to be rising rapidly for skilled manufacturing and construction workers, indicating a scarcity of qualified workers. Pockets of unemployment remain in the state, both geographically and structurally. The Gateway Cities have seen their unemployment fall, but their unemployment is still stubbornly above unemployment in the Boston area. Likewise, unemployment of those with a high school degree or less is coming down, but remains considerably above those with a college degree. As the labor market for qualified workers becomes ever tighter, the state faces the challenge of helping low-to-moderately skilled unemployed workers slot in to available job openings.

The MassBenchmarks Board expects that the Bay State economy will continue to experience moderate growth in 2017. The board recognizes that the state's economy depends on the performance of the national and global economies. With respect to the national economy, the board assumes that the Trump administration's stated positions of lower taxes and higher infrastructure spending will provide a boost to the economy. The board acknowledges that the international economy has been performing "below par" for the past four years and seems very likely to continue this trend for at least another year.

On everyone's mind is the impending presidency of Donald Trump, and what it might mean for the state economy, in addition to his broad fiscal policies as discussed above. While there is considerable uncertainty regarding specific policy initiatives a Trump administration might undertake, his rhetoric over the course of the presidential campaign suggests that changes may be coming in some of the following areas:

Infrastructure Investment: President-elect Trump has consistently called for a sizeable investment in the country's infrastructure. Though the magnitude and the source of funding for these investments have yet to be determined, the state could benefit in at least two ways. In the short- to medium-term, there could be positive employment effects, especially in the construction industry. These benefits could well be distributed across the state. In addition, modernizing the state's infrastructure would boost the productive capacity of the state economy.

Military Spending: The defense industry is one of the leading sectors in the state economy, and is the state's largest recipient of federal government contracts. Much of the defense-related activity is concentrated in the state's high technology industries. These sectors could benefit from an expanding Defense Department budget.

Immigration Policy: For decades the state has experienced negative net domestic migration. Though the magnitude varies over the course of business cycles, the net outflow of state residents has been a constant. Countering this pattern has been the steady inflow of international migrants. If immigration policies become more restrictive this may thwart the state's ability to attract these migrants. It should be noted that the President-elect has stated his support for legal immigration, and the immigration of highly skilled individuals.

Higher Education: Related to the issue of immigration, the state's sizeable higher education sector has increasingly enrolled international students. These students may find it more difficult to enter the United States during a Trump administration, and more may choose not to apply in the first place.

Health Care: The state can be affected by changes in health care policy in more than one dimension. Most obviously, the state has benefitted financially from the Affordable Care Act (ACA), especially in the federal government support for the Medicaid expansion. President-elect Trump has promised to repeal the ACA, though the timing and what will replace the ACA remain uncertain, and any changes will have to come through the Congress. The state's prominent positions in medical research, in pharmaceuticals, and in medical device manufacturing could all be affected by significant discontinuities in federal health care policy.

International Trade: During the presidential campaign, President-elect Trump promised to renegotiate existing international trade relations and impose high tariffs for some imported products. While merchandise exports are a small part of the state economy, they are still important to much of our high technology sector. Service exports, though less subject to measurement, are more important. Consulting services, higher education, health services, and software and information technology services depend on sales to international customers/patients/students. A "trade war" could adversely affect these prominent sectors of the state economy.

This is but a partial list of possible impacts of the incoming Trump administration. Until the policy priorities of the new administration become clearer later this year, state policymakers will be forced to contend with an uncertain policy environment in addition to a sluggish global economy. While the stakes for Massachusetts are very high, the Commonwealth remains one of the most competitive economies in the world and is as well positioned as any state in the U.S. to manage through whatever comes next.

This summary reflects the discussion of the members of the Editorial Board of MassBenchmarks at its meeting on December 9, 2016. 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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