Executive Summary

Economic Conditions

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.

Unprecedented national uncertainty

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.

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.

MA and US Consumer Confidence

Sources: US Conference Board and MassInsight

An investor’s recession

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.

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.

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.

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).

Increase in Unemployment Claims, 2000-2001, by Weekly Wage

Source: Massachusetts Division of Employment and Training

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.

No evidence yet of recovery

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.”

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.

Massachusetts Benchmarks Index of Leading Indicators

Source: University of Massachusetts

Massachusetts last in, last out

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.

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.

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.

MA and US Employment Growth, 2001-2002

Source: U.S. Department of Labor, Monthly Employment Survey
Note: revised data for 2002 will be released in March 2003

A similar pattern holds for growth in total wages and salaries.

Total Wage & Salary Growth: MA and US

Calendar Year Quarters
Source: U.S. Department of Commerce, Bureau of Economic Analysis

These patterns are in part attributable to Massachusetts’ greater concentration in high technology and financial services, sectors that remain sluggish.