Massachusetts Economy Outpaces U.S. at the End of 2020, MassBenchmarks Reports

In the fourth quarter of 2020, the Massachusetts real gross domestic product (GDP) increased at a 7.9% annualized rate of growth, according to the UMass Amherst Donahue Institute’s MassBenchmarks report, while the U.S. GDP increased at a 4% rate according to the U.S. Bureau of Economic Analysis (BEA). In the third quarter, both the nation and the state expanded at the fastest pace on record with Massachusetts GDP increasing at a 33.1% rate and U.S. GDP growing at a 33.4% rate.

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The sharp slowdown in the pace of growth from the third quarter was expected and reflects a transition from the period of very strong growth associated with the reopening of much of the economy during the summer and which more recently has slowed to a more restrained pace as winter approached and the COVID-19 virus returned with a vengeance. Another factor limiting growth in the fourth quarter was the reduction in income, including unemployment compensation, associated with the waning effects of the CARES Act and related stimulus programs. The quarter ended with state economic growth stalling in December in the midst of a virulent resurgence of COVID cases. Payroll employment declined at both the national and the state level in December, while joblessness rose in Massachusetts and held steady nationwide.

During the fourth quarter of 2020, the Massachusetts economy fared better than the U.S. in terms of GDP, employment, and wage and salary income growth.

Payroll employment in Massachusetts grew at a 7.8% annual rate in the fourth quarter as compared to a 5.2% rate for the U.S. In the third quarter, employment in Massachusetts grew faster than the nation, expanding at a 29.5% rate in the Commonwealth versus a 23.0% rate nationally. In this respect, Massachusetts was playing “catch up” relative to the U.S., as its shutdown in the Spring was more widespread and extended. Payroll employment in Massachusetts in the fourth quarter remained 9.2% below the employment levels in the fourth quarter of 2019, while employment in the U.S. was 6.0% below its Q4 2019 levels.

Massachusetts wage and salary growth in the fourth quarter was very strong, expanding at a 26.1% annual rate. This estimate is based on state withholding taxes and excludes unemployment insurance withholdings. Nationally, wages and salaries grew at an 8.9% annual rate in Q4. The strong showing for Massachusetts may reflect in part a good bonus season. The S&P stock index finished 2020 up 16.3% year over year.

Wage and salary income in the fourth quarter exceeded that of the fourth quarter of 2019, by 2.2% in Massachusetts and 2% in the U.S. “The stark contrast between the return of payroll income to pre-pandemic levels and the lack of a commensurate return of employment to pre-pandemic levels reflects the inequality of the economic impact of the pandemic on different industrial sectors and workers,” noted Alan Clayton-Matthews, MassBenchmarks senior contributing editor and professor emeritus of economics and public policy at Northeastern University, who compiles and analyzes the Current and Leading Indexes. “Low-wage sectors such as leisure and hospitality and personal services were hit the hardest in the shutdown and remain the sectors experiencing the slowest employment recovery,” Clayton-Matthews added.

Unemployment rates fell during the fourth quarter but remain higher in Massachusetts than in the U.S. and well above pre-pandemic levels. In December 2020 the unemployment rate for Massachusetts stood at 7.4%, as compared to 6.7% for the U.S. In September 2020, unemployment rates were 9.8% in Massachusetts and 7.9% in the U.S. In December 2019, they were 2.8% in Massachusetts and 3.5% in the U.S.

The labor market is weaker than the unemployment rates suggest, since people who drop out of the labor force because they cannot find work or have to stay at home are not counted as unemployed in the headline unemployment rate. The labor force in Massachusetts in December remained 175,800 below December 2019 levels, reflecting a drop in labor force participation of 3.4 percentage points. Labor force participation rates for the U.S. dropped 1.7 percentage points during the same period.

The pandemic's impact on the labor market has been more severe for women than for men in Massachusetts. According to the Current Population Survey for Massachusetts, between December 2019 and December 2020, the number of unemployed individuals increased 64 percent more for women than for men, and the drop in both the number employed and the size of the labor force for women was approximately twice that for men.

The U-6 unemployment rate–which includes persons working part-time but who want full-time work and persons who want work but have not looked for work in the last four weeks–was 11.3% for Massachusetts in December and 11.7% for the U.S. These rates are lower than at the end of Q3, when they stood at 14.3% in Massachusetts and 12.8% nationally. In December 2019, they were 6.2% in Massachusetts and 6.7% in the U.S.

Consumer spending in Massachusetts remained strong in the fourth quarter. As estimated by state regular and motor vehicle sales taxes, spending on these taxable items was up 6.8% on an annualized basis in the fourth quarter. In the third quarter, such spending expanded by an annualized rate of 85.6%. Year over year this spending was up 6.4%. The rebound in spending on goods to above pre-pandemic levels is consistent with robust wage and salary growth, the wealth effect associated with the performance of the stock market, and the benefits of income support provided by federal stimulus programs. At the same time, state meals tax revenues suggest a substantial slowdown in restaurant spending year over year, reflecting pandemic shutdowns and consumers' safety concerns.

The slowdown in growth at the end of the fourth quarter is expected to continue into the first quarter of 2021 as COVID case levels are expected to remain high, the cold weather limits safer outside activity, and the lifting of restrictions on business activity is delayed or slowed more than previously hoped. The federal stimulus passed in late December will help offset this slowdown somewhat in the first quarter. The expected cumulative increase in the vaccinated population during the winter and spring should allow a gradual and steady reopening of the economy. For these reasons, the average estimate of U.S. GDP growth in the first and second quarters of this year from the Wall Street Journal survey of economists is 2.2% in the first quarter and 4.9 percent in the second quarter. The outlook for Massachusetts is similar, assuming a steady rise in vaccinations and an associated decline in the prevalence and impact of the ongoing COVID-19 pandemic.

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