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State’s economy vulnerable, analysts say

Recovery strong so far, but uneven

By Robert Gavin
Globe Staff / October 12, 2010

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The state’s economy is growing faster than the nation’s as a whole, but the recovery here remains uneven and vulnerable to faltering national conditions, according to an analysis by leading local economists.

Massachusetts employment over the past few months has expanded at the fastest rate in decades, while only one state, Texas, has added more jobs over the past year, according to the analysis, released yesterday by the University of Massachusetts.

“The Massachusetts economy has been growing faster than the national economy since the state started on the path to recovery well over a year ago,’’ the report said.

Worldwide demand for technology products has driven the state’s growth, the analysis said, boosting the state’s equipment manufacturers and other tech-related sectors, such as computer systems design.

But a struggling national economy threatens to under mine this demand, putting the state’s recovery at risk, according to the analysis. Last month, the nation shed jobs for the fourth consecutive month as private-sector gains were too weak to offset steep cuts in government employment, the US Labor Department reported Friday.

The state reports September employment figures next week.

“There are a number of reasons to be concerned that the Commonwealth’s current growth trajectory is not sustainable,’’ the economists said in the analysis. “If the national recovery continues to flounder, the state will likely experience a slowing rate of economic growth in the months to come.’’

The analysis summarizes the Oct. 1 discussion of the editorial board of MassBenchmarks, a quarterly economic journal published by UMass. The board includes economists from UMass, Northeastern University, Harvard University, Boston University, Wellesley College, and the Massachusetts Institute of Technology, as well as the Federal Reserve Bank of Boston, the Federal Deposit Insurance Corp., and State Street Corp.

The economists agreed that the Massachusetts recovery began in the spring of 2009, and has gained strength this year. The state’s economy expanded more than twice as fast as the nation’s as a whole in the second quarter, after growing significantly faster in the first quarter, too, UMass reported recently.

Over the past six months, the state has added about 60,000 jobs, while the unemployment rate has dropped more than half a point. Employment during that period expanded at a 4 percent annual rate, about quadruple the national pace.

Massachusetts has emerged from the recent downturn more quickly than many other parts of the country in large part because its economy is driven more by technology and business investment and less by housing and consumer spending. A collapse in housing, which sparked a global financial crisis, and a pull-back in consumer spending led the nation into what has been called the worst recession since the Great Depression.

While consumer spending has sputtered, business spending has surged, boosting the many Massachusetts firms that sell goods and services to other companies. Nationally, business investment in equipment and software jumped at annual rates above 20 percent in the first two quarters of the year, according to the US Commerce Department.

But this level of business spending is unlikely to continue in the face of an anemic national recovery, the economists warned. If businesses don’t see demand for their products pick up, they will eventually cut back on equipment purchases, which would hurt job growth in Massachusetts.

Many signs suggest the national recovery will remain sluggish. The boost that manufacturers received as companies rebuilt inventories that were slashed during the recession is fading, as is the impact of federal stimulus programs, the UMass analysis said.

Meanwhile, there’s little evidence that US households, struggling under heavy debt, declining home values, tight credit, and high unemployment, are ready to pick up the slack and accelerate spending, economists said. Consumer spending drives about 70 percent of the nation’s economic activity.

Despite the recent job gains, Massachusetts still has 100,000 fewer jobs than when the recent recession began. Moreover, the state never regained all the jobs lost in 2001 technology bust. Employment levels remain about 200,000 jobs below the 2001 peak, the economists noted.

“While the state has seen a milder recession and a faster recovery than the nation overall,’’ the report said, “the recovery is fragile and uneven.’’

The official unemployment rate dipped below 9 percent in August, but more than 300,000 people remain jobless. In addition, thousands more residents are either working part-time jobs because they can’t find full-time work, or have given up looking, meaning they are no longer counted as unemployed.

When these underemployed and discouraged workers are included in calculations, the unemployment rate tops 13 percent, according to an analysis of employment data by Alan Clayton-Matthews, a Northeastern University professor.

The recovery has also been geographically uneven, with much of the strength concentrated in Greater Boston. In August, for example, the unemployment rate in the Boston metropolitan area was just over 7 percent, compared with nearly 10 percent in Brockton and Springfield, 11 percent in Leominster-Fitchburg, and about 12 percent in New Bedford and Lawrence.

Robert Gavin can be reached at rgavin@globe.com.