Massachusetts economy slowed in Q2 despite strong labor market

Economists are somewhat baffled by the mixed messages about the Massachusetts economy.

On the one hand, the state’s labor market remains strong. The 3.7% unemployment rate is even lower than it was in March at 4.3%.

But the amount of goods and services workers are producing is slightly decreasing. In Massachusetts, real GDP fell by 0.2% in the second quarter, a bit less than the 0.9% drop nationally.

“It's very strange that we have such strong job growth at the same time we're having negative output growth,” said Alan Clayton-Matthews, who co-authored the latest MassBenchmarks report from the UMass Donahue Institute. "That is something new."

Clayton-Matthews believes a few factors could be at play.

For one, companies produced too much inventory at the end of last year to meet rising demand, so now they’re slowing down. He also said some companies may be “labor hoarding” — or hanging on to employees they may not need in response to the ongoing labor shortage. In addition, a lot of the recent growth in jobs has also been in sectors that pay lower wages, such as the hospitality category, which includes hotels and restaurants.

The real economic bogeyman, however, is inflation, which has hurt many residents.

In Massachusetts, wages and salaries are up 6% compared to last year’s second quarter. But that has not been enough to keep up with rising prices. Nationally, prices are 9.1% higher than they were last year.

“If inflation keeps up at this pace, the real value of spending will fall and that's what has economists worried,”  Clayton-Matthews said.

Some of that worry is affecting businesses. Business confidence has been steadily decreasing since April, according to the Associated Industries of Massachusetts. In June, the group's Massachusetts Business Confidence Index was 50.8, down 12.6 points from a year ago.

Researchers at the Donahue Institute say they're expecting slower economic growth in Massachusetts for the rest of 2022, although it's impossible to predict exactly what will happen in the coming months.

In the long term, Clayton-Matthews says one of the biggest economic challenges will come from the worsening shortage of workers — especially in high-tech.