The Massachusetts Current Economic Index for September was 235.7, a decrease of 3.7 percent from August (annualized) and an increase of 3.8 percent from September 2022. The current index was normalized to 100 in July 1987 and is calibrated to grow at the same rate as Massachusetts real gross domestic product over the period 1978–2022.
In the third quarter of 2023, Massachusetts’ real gross state product (GDP) increased at an annual rate of 3.8 percent, according to MassBenchmarks, while U.S. GDP increased at an annual rate of 4.9 percent, according to the U.S. Bureau of Economic Analysis (BEA). In the second quarter of 2023, Massachusetts’ GDP grew at an annual rate of 3.6 percent, according to MassBenchmarks, while U.S. GDP grew at an annual rate of 2.1 percent, according to BEA.
The strong third quarter came as a surprise to economists, who in July forecast annual growth of less than 1 percent in the third quarter. The MassBenchmarks estimate for third-quarter federal GDP growth was 0.7 percent, while the Wall Street Journal economists’ survey for the U.S. expected 0.6 percent. Strong employment growth and robust consumer spending over the summer also contributed to the strong growth, as additions to inventories. Growth is expected to slow significantly in the fall and winter.
The number of wage and salary workers rose 1.7 percent annually in both Massachusetts and the U.S. in the third quarter, a remarkable pace given the Fed’s efforts to slow the economy. This pace is unlikely to be maintained in the current quarter. Nationally, wage growth slowed in October. (State estimates for October will be available later this month.)
In Massachusetts, there appears to be little opportunity to displace more workers from the population. The state’s unemployment rate is at a historic low of 2.6 percent in September, compared to 3.8 percent in the United States. The broader U-6 unemployment rate, which counts involuntary part-time workers and people only marginally connected to the labor force as unemployed, is considered unemployed at just 5.4 percent in Massachusetts, near an all-time low. The number of part-time workers seeking full-time work is about 25 percent below pre-pandemic levels, and the number of marginally employed workers is also well below pre-pandemic levels. Labor force participation rates in the state have not returned to pre-pandemic levels, but that does not indicate a lull or the ability to hire new workers; Rather, it reflects the demographic aging of the working-age population. Prime-age workers (25-54) are participating at the same rate as before the pandemic, but older workers are not, as the average age of those over 55 increases as baby boomers age.
Income and spending indicators in Massachusetts – based on tax revenues – suggest some weakness in the state’s economy compared to the U.S., while wage and salary income statewide rose 5.6 percent on an annualized basis in the third quarter, according to BEA Wage and salary income State withholding tax revenue rose more slowly in the third quarter, at an annual rate of 3.5 percent.
Spending on items subject to regular state sales tax and vehicle sales tax fell significantly in the third quarter, at an annual rate of nearly 25 percent. This is a volatile metric – such tax revenues can fluctuate significantly from quarter to quarter – but a change of this magnitude is not common. While the majority of this spending reflects consumer spending on goods, a significant portion of the amount – perhaps a fifth – reflects business spending on taxable goods.
Adding to expectations of slower growth in the current quarter is a slow upward trend in a measure of state jobless claims, the number of initial payments. This is not a sharp increase indicating a turning point, but is consistent with a weakening of labor demand or a longer job search for job changers.
Inflation, as measured by the Bureau of Labor Statistics Consumer Price Index, was more moderate in the Boston area than the nation as a whole. On an annual basis, prices in the Boston area rose 2.2 percent compared to 3.6 percent in the U.S. in the third quarter. Excluding food and energy, core prices rose 1.8 percent in Boston in the third quarter, compared with 2.8 percent in the United States. Compared to the third quarter of 2022, overall prices in the Boston area were 2.7 percent higher in the third quarter of 2023, compared to 3.6 percent in the U.S., while core prices in Boston were 3.5 percent higher, compared to 4.4 percent in the USA
Massachusetts GDP growth is expected to slow to an annual rate of 1.9 percent in the fourth quarter and to a rate of 0.3 percent in the first quarter of next year. Key to this slowdown are leading indicators for automobile spending, jobless claims, stock prices, the interest rate spread between 10-year and 3-month Treasury bonds (related to Fed interest rate policy), and weak consumer confidence. Average expectations for U.S. GDP growth, according to the Wall Street Journal’s October survey of economists, are for 0.9 percent growth in the fourth quarter and 0.4 percent growth in the first quarter of next year.
The current and historical quarterly estimates for state domestic product growth include adjustments for changes in productivity growth. These adjustments are estimates of quarterly deviations from the growth trend of the output-to-employment ratio over the period 1978-2022. In the third quarter of 2023, these adjustments contributed 0.9 percentage points to growth. In the second quarter of 2023, these adjustments reduced growth by 1.9 percentage points. In the first quarter of 2023, these adjustments reduced growth by 2.5 percentage points. In the fourth quarter of 2023 and the first quarter of 2024, these adjustments are expected to increase growth by 0.9 percentage points.
The current and historical quarterly estimates also include “cyclical” adjustments, since the relationship between the growth of current indicators and that of gross domestic product changes over the business cycle. In the third quarter of 2023, these adjustments contributed 0.9 percentage points to growth. These adjustments will take place in the second quarter of 2023
2.7 percentage points deducted from growth. In the first quarter of 2023, these adjustments reduced growth by 0.5 percentage points. In the fourth quarter of 2023 and the first quarter of 2024, these adjustments are expected to increase growth by 4.7 and 4.9 percentage points, respectively.
With each publication, several current months of the current index are revised. These revisions are a result of the statistical methodology used to construct the index as well as revisions to the underlying indicators.
All indicators in the current index are for Massachusetts. The current index consists of four indicators: non-agricultural employment, withholding taxes, sales taxes and unemployment rate. Withholding taxes and sales taxes are deflated using the U.S. Consumer Price Index for all urban consumers, excluding food and energy.
For a description of the methodology used to create this index, see: Alan Clayton-Matthews and James H. Stock, “An application of the Stock/Watson index methodology to the Massachusetts economy,” Journal of Economic and Social Measurement, vol. 25 (1998/1999), pp. 183-233.
Alan Clayton-Matthews November 6, 2023 MassBenchmarks Associate Professor Emeritus School of Public Policy and Urban Affairs and Department of Economics Northeastern University
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