Headwinds at year’s end slowed state economy

But faster growth expected to return

By Megan Woolhouse
Globe Staff / January 29, 2011

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The Massachusetts economy slowed significantly in the fourth quarter of 2010, lagging behind the US economy for the first time in a year, the University of Massachusetts reported yesterday.

After a burst of growth in the first half of last year, the recent slowdown reflected a state economy that has “paused to catch its breath, rather than one that is about to slow to a stop,’’ analysts said in the report. Still, the weak performance was another reminder of what has been a difficult and sluggish economic recovery.

“I expected a slowdown — maybe not quite this much — compared to the US rate of growth,’’ said Alan Clayton-Matthews, an economics professor at Northeastern University who prepared the estimates of state economic growth for the UMass report. “We still have a high unemployment rate and the econ omy still has a long way to go before it is in a sense ‘normal.’ ’’

The Massachusetts economy grew at an annual rate of 1.8 percent in the fourth quarter, down from 3.6 percent in the third quarter, UMass said in its quarterly economics journal, MassBenchmarks. The national economy expanded at a 3.2 percent rate, accelerating from 2.6 percent in the previous three months, the Commerce Department said yesterday.

It was the first time since the end of 2009 that the US economy outpaced the state’s.

For much of the past year, Massachusetts has recovered faster than the nation as a whole, in large part because the state economy relies more on business spending and technology, and less on consumer spending and housing. The state has a high concentration of firms that sell goods and services, particularly technology products, to other companies.

Massachusetts’ burst of growth in the first half of 2010 was fueled by an international spike in demand for technology products, including semiconductors and semiconductor equipment, the UMass analysts said. US business spending on technology products increased dramatically over most of last year, growing at annual rates above 20 percent in the first two quarters, and more than 15 percent in the third quarter, according to the Commerce Department.

But that spending downshifted dramatically in the fourth quarter, to an annual rate of less than 6 percent, the Commerce Department reported yesterday. With technology equipment sales at or near prerecession peaks, growth rates have leveled off, according to UMass analysts. As a result, so has the Massachusetts economy.

“The technology sector has been driving our growth since the end of the recession and in the fourth quarter it continued to grow, but not as fast,’’ said Michael D. Goodman, an economic analyst and professor at the University of Massachusetts Dartmouth. “It’s pulling us forward but not as strongly.’’

Despite slowing recently, the UMass report noted, demand for information technology remains at high levels and will help technology-based sectors, such as professional and technical services, to add jobs. The state economy should begin to pick up and accelerate over the next several months, matching national economic growth rates, the report said.

The slowing of the Massachusetts economy was reflected in several areas, according to the report. The official unemployment rate fell to 8.2 percent in the fourth quarter from 8.7 percent in the third. But a broader measure of unemployment that includes workers who have taken part-time jobs because they can’t find full-time positions, and people who have dropped out of the labor force, rose to 14.2 percent last quarter from 13 percent in the previous three months.

That was still lower than the US rate of 16.9 percent in the fourth quarter.

Meanwhile, income growth in Massachusetts slowed, and consumer spending declined slightly as households reined in spending on computers, furniture, and appliances, according the UMass report. In contrast, consumer spending nationally increased at a strong 4.4 percent annual rate in the fourth quarter, up from a 2.4 percent rate in the third quarter.

The UMass analysis estimates spending based on state sales tax collections, but did not include December holiday collections, so the decline in spending may have been less, Clayton-Matthews said. The US consumer spending figure includes December activity.

There are signs that the state economy will strengthen in coming months, according to the UMass report. Stock prices of Massachusetts companies are up, rising 13 percent in the fourth quarter, according to the Bloomberg Massachusetts Index. Consumer confidence also increased, while first-time claims for unemployment benefits have declined.

“This is the slowest quarter I expect,’’ Clayton-Matthews said.

Megan Woolhouse can be reached at