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At the beginning of this year, 2023 appeared like a fairly strong year for the Massachusetts economy. Amidst fears of an imminent recession that never occurred, growth in real gross domestic product (GDP) in both Massachusetts and the U.S. stayed in expansion mode and was unexpectedly high. The growth came despite elevated interest rates that have been only partially successful, thus far, in bringing down inflation. The Massachusetts unemployment rate also hit record low levels and jobs growth was robust (at least it seemed at the time) with most industry sectors posting gains.
Recent data, however, show that the Massachusetts economy has started to cool heading into mid-2024, and the supposedly robust job growth seen in 2023 has been largely erased through a downward revision by the Bureau of Labor Statistics. Although a long-anticipated recession has been averted, a slowing in the state’s economy can now be seen in weaker GDP growth, little or no job growth in the key professional and business services sector, and an increase in marginally attached workers (people who want work but have not looked in the past four weeks). The uncertainties are compounded by inflation rates that remain at higher-than-desired levels and by the risk that Massachusetts may be losing talent to other states. On the plus side, state tax revenues were strong in the all-important month of April, the working age population experienced a recent uptick, and the unemployment rate remains low. Overall, however, the Editorial Board is now sensing a less buoyant Massachusetts economy accompanied by an increase in downside risks.
GDP
In the latter half of 2023, Massachusetts and the United States both experienced stronger than expected growth in real gross domestic product and avoided sliding into a recession. Since reaching annual growth rates approaching 4 percent in the second half of 2023, however, the pace of growth has slowed. In the first quarter of 2024, Massachusetts GDP decelerated to a 1.8 percent annualized rate, according to MassBenchmarks, while U.S. GDP ratcheted down to a 1.6 percent annualized rate, according to the U.S. Bureau of Economic Analysis (BEA). Looking into future quarters, GDP growth rates are projected to maintain a slow-to-steady (positive) course, according to both a Wall Street Journal survey of economists as well as MassBenchmarks.
Employment and unemployment
While the growth in Massachusetts GDP, though slowing, remains a positive feature of the state’s economy, the trends in payroll jobs are less sanguine. Following an adjustment by the Bureau of Labor Statistics, what had been a fairly robust picture of Massachusetts jobs growth in 2023 has become a dimmer assessment showing little or no jobs growth. Heading into mid-2024, Massachusetts jobs numbers appear to be on the rise again, (payroll employment grew 1.0 percent on an annualized basis in the first four months of this year relative to December of last year, more slowly than the national growth rate of 1.9 percent over the same period), but uncertainty remains because these numbers, too, could be revised downward. Looking at key sectors of the Massachusetts economy, there is concern that professional and business services (which includes engineering, computer systems design, and R&D and is foundational to the state’s technology-based economy) is no longer growing. This may be a vestige of higher interest rates and resulting difficulties in accessing capital for the sector, which in some instances has led to layoffs. Construction jobs continue to increase, led by non-building infrastructure projects, but some of the recent increases may represent a seasonal blip (noting that nonbuilding construction has been leading the numbers for over a year now) due to the mild winter. Leisure and hospitality, as well as the state’s key healthcare and education sector, are also experiencing growth.
The Massachusetts unemployment rate remains close to historic lows, at 2.9 percent in March as compared to 3.8 percent for the U.S. At this point in the economic cycle, most remaining slack in the labor market has been soaked up, making it more challenging to fill additional jobs moving forward. A slight uptick in the state’s marginally attached labor force during the first quarter of 2024, however, may indicate that the pool of available workers is still increasing, although that uptick could instead be an early sign of a weakening economy.
Domestic outmigration and immigration
The Editorial Board had an extensive discussion about the implications of a concerning outward flow of Massachusetts residents moving to other states, in combination with the state being one of the most popular destinations for people coming into the United States from other countries. Both have major ramifications on labor force growth and shaping public policy. While the state has lost population to other states for decades, the trend became more acute in 2021 and 2022. Although 2023 showed some improvement, net negative outmigration is a long-term structural issue for Massachusetts and the overall trend has been towards increased out-migration. High housing, childcare, and healthcare costs may be affecting decisions to move as well as taxation, congestion, and unreliable public transit. Massachusetts’ strengths in professional services and technology also promotes remote work which, in turn, makes it possible to still work for a Massachusetts business, but from new homes in Maine, New Hampshire, Florida, or elsewhere. Recent studies have demonstrated a proclivity for the young and educated to leave Massachusetts. Longer-term, this dynamic—should it persist at higher levels—will erode the state’s overall competitiveness, and initiatives will need to be redoubled to retain and attract talent to the state.
Counteracting the movement of people to other states, Massachusetts continues to be a magnet for foreign in-migrants. That, combined with natural increases in population (births minus deaths) has allowed the state’s population to grow in most years, albeit slowly. A recent influx of immigrants into the United States as reported by the Congressional Budget Office (CBO) may be starting to percolate to the Massachusetts working age population, which is now on a relatively strong upward growth trajectory after showing essentially no growth for several years. Much of the immigrant population coming into Massachusetts have skills learned in their native countries that can benefit the state’s businesses once necessary permits and jobs placements have been executed. Policies to engage immigrants effectively and bring them quickly into the labor market and onto career paths represents an opportunity for the Massachusetts economy by providing a pipeline of new workers. Although this can be an extended process, potentially large positive employment impacts due to the growth of in-migrants may be seen in Massachusetts in coming years.
Conclusion
As Massachusetts heads into the mid- and latter parts of 2024, there is an increasing sense of caution concerning the direction of the state’s economy. The economy is not as strong as first thought and there is a perceptible loss in momentum, notably in jobs and slowing growth in GDP. Economic growth in the state, along with the national economy, likely peaked in the second half of 2023, and slower growth is now anticipated for 2024. The slowdown, in part, may be due to the delayed effects of higher interest rates finally coming home to roost. With the slowdown in growth, the question of whether there will be a recession in coming quarters reemerges (noting that none is currently forecast), or whether instead the state and nation are headed for a “soft landing” phase of slow but stable growth and lower inflation. On the positive side, inflation concerns may be slowly ebbing, interest rates have plateaued, some demographics are becoming more favorable for population and workforce growth, and Massachusetts’ state tax revenues are meeting or exceeding expectations. The overall message about the state’s economy is currently quite mixed, which points to a continuing need to adapt to the disruptions and uncertainties of the post-pandemic economy.
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