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<p>Following the longest economic expansion in U.S. history, the 1990s culminated
in over-investment in information technology, followed by a collapse of business
investment and recession beginning in March 2001. The sharpest stock market decline
in many decades wiped out considerable wealth and sent consumer confidence plummeting.</p>
<h5>Unprecedented
national uncertainty</h5>
<p>The economy continues to struggle in a period of unprecedented
national uncertainty. Six months into the recession, the nation suffered the
horrific September 11th
terrorist attack. The economic impact of the attack briefly abated following
the war in Afghanistan. However, continuing weakness in the stock market was
followed by deteriorating business conditions as employment continued to drop
and the crisis in Iraq grew over the last year.</p>
<p>Business confidence in Massachusetts
has been declining sharply since early 2000 and it remains at a level comparable
to the recession of the early 1990s.
Consumer
confidence, both in Massachusetts and nationally, continues to decline.</p>
<p align="center"><b>MA and US Consumer Confidence</b><font size="-2"><br>
<img src="/bb/fy2004h1/images/chart002.gif" alt="MA and US Consumer Confidence" border="0"><br>
Sources: US Conference Board and MassInsight</font></p>
<h5>An investor’s
recession</h5>
<p>Economic downturns are always hardest on those with fewer resources.
But the recent recession also had an unusually strong impact on those at higher
income
levels, with profound consequences for state revenues.</p>
<p>The most obvious and
important illustration of this has been the decline in capital gains. After
mushrooming eight-fold from 1988 (the last pre-recession
year) to
2000, capital gains realizations in Massachusetts dropped by 57 percent in
2001 (the last year for which complete data is available). Declines in capital
gains
tax receipts have continued in the current fiscal year. During the 1989-91
recession, capital gains were a much smaller part of the tax base and, therefore,
did not suffer to a comparable extent.</p>
<p>In terms of employment, job losses have
been unusually concentrated at the higher end. From 2000 to 2001, unemployment
claims in Massachusetts rose 69
percent
among those with four or more years of college compared to 25 percent for those
with less education. In the recession of 1989-1991, about 13 percent of job
losses in Massachusetts were in the high-tech sector whereas in the current
recession,
a full 42 percent were concentrated in that sector.</p>
<p>Wages and salaries in the
high-tech sector average 85 percent higher than in the rest of the Massachusetts
economy. Growth in unemployment claims between
2000 and 2001 was slowest among the lowest paid (12 percent for those with
weekly earnings below $500) and most rapid among the highest paid (48 percent
for workers
with weekly earnings of over $1,500).</p>
<p align="center"><b>Increase in Unemployment Claims, 2000-2001, by Weekly Wage</b><font size="-2"><br>
<img src="/bb/fy2004h1/images/chart003.gif"><br>
Source: Massachusetts Division of Employment and Training</font></p>
<p>The concentration of job loss at the high
end – jobs where bonus payments
were an important part of compensation – means that a relatively mild
recession in terms of employment loss produced large declines in taxable earnings.</p>
<h5>No
evidence yet of recovery</h5>
<p>There is no indication yet of an imminent recovery.
The Boston Federal Reserve Bank summarized its most recent business survey
by stating that the region’s
economy “remains soft.”</p>
<p>There are some indications (such as the
apparent stabilization of state corporate profit tax receipts) that the worst
may be over for much of the Massachusetts
business sector. However, this likely reflects cost cutting rather than sales
growth. Employment – which is usually a lagging indicator – continues
to drop at an annual rate of 1.5-2 percent. The University of Massachusetts
Benchmarks Index of leading indicators predicted slow economic growth earlier
this year
(as did other forecasters), but now projects a flat economy over the next six
months.</p>
<p align="center"><b>Massachusetts Benchmarks Index of Leading Indicators</b><font size="-2"><br>
<img src="/bb/fy2004h1/images/chart004.gif"><br>
Source: University of Massachusetts</font></p>
<h5>Massachusetts last in, last out</h5>
<p>The downturn hit Massachusetts later than much
of the rest of the country, but it also appears that our recovery may be
later and slower.</p>
<p>The U.S. GDP was negative for the first three quarters of
2001, but has since turned positive with 2.4 percent real growth in 2002.
No official
Massachusetts
data are available yet for that period, but UMass Benchmarks data indicate
that Massachusetts has yet to return to positive growth.</p>
<p>Employment
grew more rapidly in Massachusetts than in the nation as a whole at the beginning
of 2001, but then declined. Unlike U.S. employment,
state
employment
has not yet recovered.</p>
<p align="center"><b>MA and US Employment Growth, 2001-2002</b><font size="-2"><br>
<img src="/bb/fy2004h1/images/chart005.gif"><br>
Source: U.S. Department of Labor, Monthly Employment Survey<br>
Note: revised data for 2002 will be released in March 2003</font></p>
<p>A similar pattern holds for growth in total wages
and salaries.</p>
<p align="center"><b>Total Wage & Salary Growth: MA and US</b><font size="-2"><br>
<img src="/bb/fy2004h1/images/chart006.gif"><br>
Calendar Year Quarters<br>
Source: U.S. Department of Commerce, Bureau of Economic
Analysis</font></p>
<p>These patterns are in part attributable to Massachusetts’ greater concentration
in high technology and financial services, sectors that remain sluggish.</p>
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