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The end of the boom times is approaching, economist Michael Goodman told a conference of investors Wednesday, but there will likely be one more year of economic growth in Massachusetts before the national economy, and the state’s economy with it, heads toward a possible recession.
A week before the revenue forecasting process for fiscal year 2020 begins on Beacon Hill, Goodman said he expects the state’s economic growth will slow down in 2019 as the impacts of federal tax cuts fade and demographic factors become more pressing.
“We are certainly in the midst of a pretty robust expansion in light of all of the international, national, demographic and other conditions here in the United States,” Goodman, executive director of the Public Policy Center at UMass Dartmouth, said at a conference organized by Treasurer Deborah Goldberg for state bond buyers. “Times are good in many respects.”
Tax Cuts, Low Unemployment Drive Problems
Driving growth in the Massachusetts economy has been a low unemployment rate and federal tax cuts, Goodman said. Real gross domestic product in Massachusetts grew at an estimated 3.3 percent annualized rate during the third quarter, according to data released in late October by MassBenchmarks.
But the state’s low unemployment rate – it was 3.5 percent in October – also points to potential trouble in the labor market, where there are more open positions than people seeking jobs, Goodman said. The issue is compounded, Goodman said, by the federal government’s desire to slow immigration, which Massachusetts relies on to fill jobs.
“The labor market now is so tight, labor supply is so constrained, that it’s hard to know where we’re going to find the people we need in order to support the growth we’re going to have in order to earn the incomes that are going to pay the taxes and generate the economic activity that makes the world go round,” he said.
Though the tax cuts associated with the new federal tax law provided a significant boost in tax revenue for the state, Goodman said the cuts generated a “sugar high” for the economy and have not spurred the level of long-term capital investment initially predicted. The recent market downturn, he said, bodes poorly for Massachusetts’ capital gains tax revenue estimates.
“The salad days on the fiscal side that we were waiting for a long time are here and it is unclear how long they’re going to last,” Goodman, who will testify at next week’s annual revenue hearing, said. “We’re still crunching numbers, but I think it’s not going to be quite as sanguine a year fiscally for Massachusetts this year as it was last year.”
Goodman pointed out that his profession has a poor track record of predicting recessions, but presented data from a 2018 Wall Street Journal survey of economists in which about 60 percent said they expect the next recession in 2020.
“I think we’ve got enough momentum in the national economy and certainly here in Massachusetts to eke out another year of expansion,” Goodman said. “But the growing consensus is that we are coming to the end of that long run and that one way or another, however modest or shallow or severe, the cycle is going to turn some time just in time for the presidential election, it looks like.”
Limited Tools to Combat a Downturn
Whenever the next economic downturn does come, Goodman said he is concerned that the country and states are “sort of disarmed” of the usual tools to combat a recession. He said states have not been stashing enough money away in preparation for a downturn and pointed out that the usual monetary policy options — like dropping interest rates 500 basis points — will be off the table.
“It is especially important at the state level that we are wise stewards of our resources and think strategically about how we invest our resources,” he said.
During her address to the investors Wednesday, Goldberg touted the recent supplemental budget bill that directed additional money into the state’s stabilization fund in hopes of being better prepared for a recession, pushing the fund’s balance above $2 billion.
Compared to other states, Massachusetts is fairly well positioned to manage the next recession because “most of the fundamentals remain strong,” Goodman said.
“We have a diverse array of industrial strengths, we do have risks related to our concentration in one region of the state and our limitations in terms of our ability to sustain our growth demographically and with our infrastructure,” he said. “But I think if you take a look at us as compared to other states, other potential investment opportunities, you’ll see that between the leadership and the capacity and the strengths that are fundamental to our economy and our commonwealth, we’re in as good of a position to ride out whatever comes next as anyone.”
