Experts Say Global Conditions, Uncertainty Slowing Economic Growth

By Michael Norton

STATE HOUSE, BOSTON, SEPT. 27, 2012–The Massachusetts economy has downshifted to a “lower gear,” held back by deteriorating global conditions, with slower growth expected to continue in the coming months, according to the latest from Massachusetts economic analysts.

According to a summary released Thursday morning of a MassBenchmarks editorial board meeting on Sept. 21, local economic analysts are seeing a slowdown in the state’s important information technology sector due to softening worldwide demand and are mindful of the potential for implementation in the new year of “precipitous” federal government tax increases and spending cuts.

The analysts reported the national economic slowdown is affecting Massachusetts after the state experienced a period of growth that exceeded growth across the rest of the country. They attributed the national slowdown to contracting household balance sheets that are discouraging consumer spending, a “fiscal drag” caused mainly by state and local government layoffs, and conditions in the housing market.

“Among these factors, only housing seems to be beginning to rise, both nationally and in Massachusetts, as both prices and sales seem to be firming and even turning around,” MassBenchmarks Editor Robert Nakosteen wrote, summing up the consensus of the board. “It is hard to envision a genuine economic expansion without a recovery in this vital sector, so this is a beneficial change.”

Noting the Congressional Budget Office estimates the federal spending cuts and tax hikes scheduled to take effect at the end of 2012 would cause a recession, the economists agreed “there is little indication that our political institutions are capable of doing what is necessary to avoid this outcome.”

With Republicans controlling the U.S. House and Democrats in charge of the U.S. Senate, Congress this session has repeatedly proven unable to find common ground on a host of issues, diminishing public confidence that Washington can chart a deficit reduction course that will facilitate economic growth. The fight for the White House between President Barack Obama and Mitt Romney adds to the uncertainty.

“As one board member commented, ‘When you begin an economic discussion and end up with a political discussion you have a problem,’” Nakosteen wrote in his meeting summary, while adding that economists are not at the point where they anticipate another recession in Massachusetts in the coming months.

The economists flagged a series of issues that are serving to slow down growth in Massachusetts:

— Trade and exports between Massachusetts businesses and their foreign partners are slowing due to recessions in parts of Europe and slower economic growth in China.

— Economists said the state’s life sciences sector remains “strong,” but information technology is taking a hit since investments in that area by U.S. companies have been “essentially stagnant” during the first two quarters of 2012 and sales of silicon computer chips are down worldwide. Massachusetts merchandise exports, which include information technology products, are down compared to last year.

“The slowdown in the nation’s economy and in Europe and the rest of the world has caught up to Massachusetts finally,” Northeastern University economics professor Alan Clayton-Matthews told the News Service Thursday morning. “There’s really nothing on the short-term horizon which is suggesting that the national, European or Asian or the rest-of-the-world economies are picking up steam.”

Noting recent job losses and “weak” tax revenue growth, Clayton-Matthews, a senior contributing editor to MassBenchmarks, said he believes gross domestic product growth in Massachusetts will be about 1 percent annualized in the third and fourth quarters of 2012, compared to 1.9 percent in the first quarter and 2.4 percent in the second quarter.

The members of the MassBenchmarks Editorial Board are:

— Katharine Bradbury, Federal Reserve Bank of Boston;
— Frederick Briemyer, Federal Deposit Insurance Corporation;
— Karl Case, Wellesley College;
— Peter Doeringer, Boston University;
— Robert Forrant, University of Massachusetts-Lowell;
— Frank Levy, Massachusetts Institute of Technology;
— Christopher Probyn, State Street Bank;
— Jim Stock, Harvard University;
— Andrew Sum, Northeastern University;
— David Terkla, University of Massachusetts-Boston;
— Paul Willen, Federal Reserve Bank of Boston.






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