Mass. economy contracted in first quarter
Grant Welker
Construction on Front Street in downtown Worcester last month. The Massachusetts economy contracted in the first quarter of 2017.
Slow growth in the U.S. economy made headlines over the last few days but in Massachusetts the economy over the first quarter of 2017 actually contracted, hamstrung by stalled wage and salary income growth, according to a new report.
Real gross domestic product in Massachusetts declined at an annual rate of 0.5 percent in the first quarter, according to a MassBenchmarks report published by the UMass Donahue Institute with the Federal Reserve Bank of Boston. The U.S. economy grew at an annual rate of 0.7 percent during the first quarter, according to the U.S. Bureau of Economic Analysis.
"While state economic growth in the first quarter was surprisingly weak, this likely reflects constraints on growth due to a looming shortage of workers rather than a lack of confidence or weakness in aggregate demand or consumer and business spending," according to the MassBenchmarks Bulletin.
Analysts said sluggish auto sales were also a factor in Massachusetts and nationally.
The bulletin described business and consumer confidence as high in Masssachusetts, but the MassBenchmarks leading index suggests the state economy is not far off from posting back-to-back quarterly contractions. Growth is expected at a "subdued pace" through September, with anticipated growth rates of 0.5 percent in the second quarter and 0.4 percent in the third quarter.
"This is well below expectations of only a few months ago, and is mainly the result of recent disappointing wage and salary income growth, and sluggish productivity growth at both the state and national level," the Benchmarks bulletin said. "To date the reason for weak growth in wage and salary income remains a puzzle. It may be a reflection of a poor 'bonus season' and could bounce back next quarter. Nevertheless, over the medium term, the state is facing looming constraints on growth as a result of a shortage of available skilled workers. The labor force challenge does not appear likely to change anytime soon."
MassBenchmarks Executive Editor Robert Nakosteen described the possibility of a labor shortage in Massachusetts as "the real cautionary flag" since employers need skilled workers to grow. "At some point that labor force constraint might become binding," he said.
But Nakosteen, professor of economics at the Isenberg School of Management at UMass-Amherst, said labor economists have been struggling with technical difficulties associated with making seasonal adjustments and cautioned that revisions to GDP numbers can be substantial.
"Wait a quarter or two more to see if there's a real trend here. I would keep my powder dry on concluding too much by this report," he said, pointing to employment, tax and consumption indicators that reflect economic strength.
It's the second consecutive quarter that the state economy's performance has trailed the national economy. The U.S. economy during the fourth quarter of 2016 grew at an annual rate of 2.1 percent, while the state economy grew at a 1.2 percent annual clip during October, November and December of 2016.
The unemployment rate in Massachusetts remains low, but rose from 3.1 percent in December to 3.6 percent in March.
MassBenchmarks Senior Contributing Editor Alan Clayton-Matthews, a professor at Northeastern University, said the rising unemployment rate reflects more people entering the market because they are confident they will find jobs.
Clayton-Matthews said weak withholding tax collections during the first quarter contributed to the economic contraction, but said he believed much of the activity stemmed from weaker seasonal bonuses to employees.
"I think things are going to pick up," he said, adding that leading indices were probably underestimating future growth patterns.
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