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Slower Job Growth Pushes Massachusetts Economy To Brink Of Recession (Technically)

The Massachusetts economy has been one of the country's strongest this cycle, as technology and life science companies flock to the state to gain access to its highly educated labor market. But low unemployment and an aging workforce are bringing the Bay State’s economy down from prior highs.

Boston's Back Bay and Fenway neighborhoods

Massachusetts’ and Boston’s unemployment rates, both 2.9%, are below the 3.5% national rate, according to the U.S. Bureau of Labor Statistics. While low unemployment is generally a good thing, it is also taking a toll on the region’s economy.

Massachusetts' gross domestic product declined by 0.2% in Q3 and is projected to stagnate in Q4 before growing by 0.1% in Q1 2020, according to MassBenchmarks, an economic journal produced by a partnership of the Federal Reserve Bank of Boston and the UMass Donahue Institute. The textbook definition of a recession is two consecutive quarters of negative real GDP, meaning Massachusetts could, by the letter of the rule, be in a recession if there is a dip in Q4. 

But the Q3 decline is less about output and has more to do with the region’s labor shortage, said Alan Clayton-Matthews, MassBenchmarks' co-editor and a Northeastern University economic professor.

“There are demographic fluctuations that are more likely to drive [the Massachusetts economy] into a recession on a technical basis, but that doesn’t mean the Massachusetts, national or even world economy is heading toward another Great Recession or even a Great Stagnation,” Clayton-Matthews said. “I think we’re in for a period of slower growth marked by heightened productivity.”

Even if Massachusetts were to enter a recession, the local real estate market is tied far more to employment growth than real GDP figures. Job growth in the area is just under 1%, according to Moody’s. That figure is down from a 2.1% high seen between 2014 and 2016, but above the 0.7% long-term average seen since 1990. 

“From an employment growth standpoint, we’re in our long-run normal range,” CBRE Senior Vice President Brian Cohen said.

Blackstone will purchase assets totaling 2.3M SF in East Cambridge for $3.5B from Brookfield.

The Massachusetts economy has also typically paced above the U.S. average this cycle, according to the U.S. Bureau of Economic Analysis. The state's output grew by 3.1% last year compared to the 2.9% national average.

But the jobs and economic data comes amid a new normal in Boston’s ongoing business growth. Companies often have smaller offices in Boston while larger offices are in parts of the country where the cost of living is lower or the talent pool is deeper. 

When General Electric announced plans to move its headquarters to Boston in 2016, the then-333,000-employee corporation only planned to employ 800 at its Fort Point development. That number has since been dropped to 250 amid the company’s ongoing financial struggles. 

Boston made the Amazon HQ2 shortlist, but the city only walked away with a 2,000-job Seaport office currently under construction, compared to the 50,000-job grand prize. New York City’s and Washington, D.C.’s deeper pools of available tech talent were cited as one of the reasons Boston came up short.

Branner Stewart, a senior research manager at the UMass Donahue Institute, said he isn’t worried by one bad quarter and noted the state often ranks in the top 10 in terms of economic output, largely based on its diverse economy rooted in higher education, healthcare, technology and life science. 

Boston is also one of five U.S. metro areas — along with San Diego, San Francisco, San Jose and Seattle — accounting for 90% of all U.S. tech job growth in the last decade, according to a Brookings Institution report released Monday. 

Given Massachusetts’ focus on more innovative industries with greater productivity, Clayton-Matthews and Stewart said the state’s Q3 economic data could even be revised upward. 

“Right now, we do have a tight labor market,” Stewart said. “But it appears employers are still able to expand and find the people they need.”

The MassBenchmarks report also stressed the Q3 data doesn’t yet show a trend and noted the Massachusetts economy previously dipped in Q1 and Q4 2016, despite growing 1.7% for the year and by 2.2% in 2017.

However, Clayton-Matthews said the state’s economic future could be compared to that of Japan’s, where an older demographic checks economic growth but a focus on the technology industry buoys productivity. Economic growth slowed for the quarter due to baby boomers retiring from the workforce in greater numbers, he added.

Massachusetts has a median age of 39.5, younger than other New England states like Vermont (42.6) and New Hampshire (43.2) but older than states with competing tech-focused markets like Texas (34.7) and California (36.5). The U.S. median age is 38.1, according to the U.S. Census Bureau.

“Massachusetts is growing faster than other New England states,” Clayton-Matthews said. “But it's older than the U.S. as a whole. Growth would be slowing here first.”

Given lower birth rates in Europe and China’s one-child policy, Clayton-Matthews expects the slower growth trend to spread.

“In most of the world, demographics will eventually lead to slower growth,” he said. “All of that will lead to lower [GDP] rates worldwide.”