Whither the U.S. and Massachusetts Economy?

John LaWare ForumMarch 24, 2009Federal Reserve Bank of Boston

Barry BluestoneDean, School of Social Science, Urban Affairs, and Public Policy

The U.S. Economy

3.6%

3.1%2.9%

2.2%

0.0%

-0.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

2004 2005 2006 2007 2008:I 2009 (est)

Real GDP Growth Rate 2004-2009

U.S. Personal Savings Rate (1998-2008:I)

4.3%

2.3%2.1%

0.4%0.2%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

1998 2000 2004 2007 2008:I

Personal Savings Rates Plummeting

U.S. Federal Debt (in $billions)(1940-2009)

$50.7$260.1 $290.5 $380.9

$909.0

$4,001.8

$5,628.7

$7,905.3

$8,950.7

$10,413.4

$0.0

$2,000.0

$4,000.0

$6,000.0

$8,000.0

$10,000.0

$12,000.0

1940 1945 1960 '1970 1980 1992 2000 2005 2007 2009 (Est.)

Federal Debt nearly double since 2000

$50,782

$52,173

$53,349

$54,127

$55,823

$57,734

$59,088$59,398

$58,545$57,920 $57,751 $57,705

$58,036$58,407

$57,648

$46,000

$48,000

$50,000

$52,000

$54,000

$56,000

$58,000

$60,000

$62,000

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Real Median Family Income ($2006)

5,481,000

9,266,000

6,688,000

12,467,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

12,000

13,000Ja

n

May

Sep

Jan

May

Sep

Jan

May

Sep

Jan

May

Sep

Jan

May

Sep

Jan

May

Sep

Jan

May

Sep

Jan

May

Sep

Jan

May

Sep

Jan

May

Sep

Jan

May

Sep

Jan

Civilian Unemployment (1998-2009) (in 000s)

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2009

Highest Unemployment Rate in 26 years (December 1983)

February 2009: 8.1%

Loss in Employment (December 2007-December 2008)

Change in Employment

Percentage Change

Construction -632,000 -8.5%

Manufacturing -791,000 -5.7%

Retail Trade -522,000 -3.4%

Financial Services -148,000 -1.8%

Temp Services -490,000 -19.0%

4.8%

8.1%

0.8%

1.5%

3.1%

5.5%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

2007 2008 2009

Labor Underutilization Rate (December 2007 vs. December 2008)

8.7%

14.8%

Official Unemployment Rate

Discouraged

Involuntary Part-time

U.S. Economy The fundamentals of the U.S. economy

began to deteriorate years ago The credit market collapse has had such

devastating consequences because the economic fundamentals were not sound

We are now seeing the result in a hard credit freeze, sharply declining GDP, and soaring unemployment

The Massachusetts Challenge

People and Jobs

• Between 2000 and 2007, the population of Massachusetts increased by less than 87,000 (1.4%) – the second slowest increase in New England (after Rhode Island) … and 1/5 the rate in the U.S.

• Much of this is due to a very low birth rate … but

• Since 2000, Massachusetts has suffered a net domestic out-migration of over 305,000 residents.

• This outflow of people has been softened only somewhat by the arrival of 206,000 foreign immigrants.

Population Trends

Massachusetts Population

5737.0

6016.4

6363.2 6407.6 6431.8 6438.5 6433.7 6429.1 6434.4 6449.8

5000.0

5200.0

5400.0

5600.0

5800.0

6000.0

6200.0

6400.0

6600.0

1980 1990 2000 2001 2002 2003 2004 2005 2006 2007

Popu

latio

n (in

thou

sand

s)

U.S. Bureau of the Census

Population Trends in New England

Population Growth, 2000-2007

1.36%

0.67%

1.86%

2.65%3.13%

6.08%

6.88%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

MA RI VT CT ME NH US

33,292 33,347 31,785 29,041 26,51530,285

27,014

-22,892

-39,506

-48,514

-61,980 -60,053

-49,528

-35,121

-80,000

-60,000

-40,000

-20,000

0

20,000

40,000

2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007

Foreign Migration Internal Migration

Immigration & Net Domestic Migration:

MassachusettsMassachusetts Domestic Net-Migration and Foreign Immigration

-15

-10

-5

0

5

10

15

20

25

30

35

Under 5 5-19 20-24 25-34 35-54 55-64 65+

Massachusetts US

Percent Change in Population by Age Cohort, Massachusetts v. U.S., 2000-2006

Who’s Leaving Massachusetts?

Net Domestic Migration (2000-2006) by Housing Cost Decile

0.38% 0.48%

2.95%

2.01%

3.56%

4.94% 5.07%

5.66%

-0.70%

-2.86%

-6.65%

-0.31%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

1st Decile 2nd Decile 3rd Decile 4th Decile 5th Decile 6th Decile 7th Decile 8th Decile 9th Decile Next 15 Next 10 Top 10

Greater Boston MSA –6.0%X

Of the 10 most expensive MSAs in the nation,All 10 had net outmigration between 2000 & 2006

Housing Cost – Top 10 MSAsHonolulu, HI

San Francisco-Oakland-Fremont, CA

Santa Cruz-Watsonville, CA

Oxnard-Thousand Oaks-Ventura, CA

San Diego-Carlsbad-San Marcos, CA

Boston-Cambridge-Quincy, MA-NH

Santa Barbara-Santa Maria-Goleta, CA

Washington-Arlington-Alexandria, DC-VA-MD-WV

New York-Northern New Jersey-Long Island, NY-NJ-PA

Los Angeles-Long Beach-Santa Ana, CA

Projected Percent Change in Households by Age Cohort, 2006-2017

The Future Demographics of Massachusetts

Change in Number of Households by Age Cohort: 2006-2017 Massachusetts

40

37,681

-82,548

111,437118,566

14,614

-6,326

-100,000

-50,000

0

50,000

100,000

150,000

18-24 25-34 35-44 45-54 55-64 65-74 75+

Source: U.S. Census Demographic Projections

Of a net increase of 193,500 households, 244,600 are projected to be age 55 +

The Mass Employment Situation

Total Unemployment – Massachusetts January 1999-January 2009

December 2007-December 2008Employment Change: -74,000

Unemployment increased by 96,000 Between January 2008 and January 2009

Massachusetts Unemployment RateJanuary 1999 – January 2009

Unemployment rate increased from 4.6% to 7.4% between January 2008 and January 2009

-3.0%

0.6%

1.5%1.8%

2.3%

3.8%

4.2%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

MA CT ME VT NH RI U.S.

-100,600 jobs

+5,609,000 jobs

Source: U.S. Bureau of Labor

Massachusetts Change in Total Non-Farm Employment (Seasonally Adjusted) (January 2001 - December 2007)

Massachusetts Change in Total Non-Farm Employment (Seasonally Adjusted) (December 2007 - December 2008)

-4.4%

-2.2%

-1.9% -1.9%-1.7%

-1.3%-1.1%

-5.0%

-4.5%

-4.0%

-3.5%

-3.0%

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

RI U.S. ME VT CT MA NH

Employment Growth (2000-2006) by Housing Cost Decile

3.56% 3.67%

5.65%5.30%

4.07%

5.54%

9.89%

8.96%

11.84%

10.30%

8.80%

5.20%

0%

2%

4%

6%

8%

10%

12%

14%

1st Decile 2nd Decile 3rd Decile 4th Decile 5th Decile 6th Decile 7th Decile 8th Decile 9th Decile Next 15 Next 10 Top 10

Greater Boston MSA –2.0% X

But some good economic news Despite endowment problems, our

universities and hospitals continue to expand, providing a strong base to the economy

Our manufacturing sector has turned the corner … increasing its share of gross state product and is poised to provide jobs for 100,000 young workers over the next decade

Massachusetts State & Local Government in Trouble

Facing a continuing budget crisis

Price Increases: Total Economy vs. Cost of State and Local Services

2000-2008:I

21.3%

26.8%

40.7%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

Total Economy Private Services State & Local Services

Price of State & Local Services risingtwice as fast as overall prices

Debt Service, Public Pensions, & Medicaid Payments as % of Massachusetts State Budget (2001-2027)

32.8% 33.5% 35.6% 37.1% 38.8% 40.1% 40.9%45.0% 46.0%

64.4%

90.1%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2018 2027

Debt Service, Public Pensions, and Medicaidwill devour most of the Mass State Budget

The Massachusetts Problem

Despite our lead in biotech and nanotech …

Despite our rich array of (once) well-endowed universities and hospitals …

Despite the beauty of Cape Cod, the Berkshires …

Despite our marvelous array of cultural attractions and amenities

The Massachusetts Problem We are #1 in cost of living in the nation We suffer from being cold … and getting

old We have a growing structural budget deficit

in the Commonwealth that will soon sink our ability to maintain the education system we need, the public social services we morally should supply, and the public infrastructure we must maintain to retain and attract the private investment

But there’s hope on the way …

What Really Needs to be Done? – National Economy

Phase I – Instant Stimulus “Uncle Sam” Debit Card Home Price Insurance System

Phase II – Short-term Stimulus Massive General State and Local

Revenue Sharing Extended Unemployment Benefits

Phase III – Longer-term Stimulus Public Infrastructure Investment

What’s to be Done? - Massachusetts

Local Option Tax, but with State meals tax and continued redistribution of state aid to older industrial cities

Capital Gains Tax Holding Tank and larger future rainy day fund

Continued investment in education and training Continued support for Chapter 40R & 40S to assure

adequate supply of housing to moderate housing cost appreciation when economy recovers

New “Grand Bargain” with public employee unions

We will get through this because …

We have smart, competent leadership in the White House

We have smart, competent leadership in the State House

We have a broad range of corporations and civic institutions that are willing to pitch in to keep Massachusetts strong and vibrant