Governor Deval Patrick blamed political gridlock in Washington and the so-called fiscal cliff as a “direct cause” of the economic slowdown that has tamped state tax collections and created a $500 million budget shortfall. But economists say other factors deserve more blame.
A weak national recovery and global economic slowdown have weighed on the Massachusetts economy since spring, they say. From April to June, before fiscal cliff references became ubiquitous, employers in the state said their payrolls grew at an annual rate of less than 1 percent, a significant downshift from the 4 percent rate of growth in hiring in the previous three months, according to the US Labor Department.
“It’s not entirely due to the fiscal cliff,” Northeastern University economist Alan Clayton-Matthews said of the cutbacks. “We’re all being affected by the slower growth in the US economy and the slowdown in growth in Asia. The world economy is slowing.”
Economists have warned of a slowdown in Massachusetts for the better part of the last two years. The state recovered from the recession faster than many others due to a strong rebound in technology, but the sector tends to operate in cycles and is prone to periodic setbacks.
Demand for semiconductors, a key indicator for the tech sector and the state economy, has been slowing for more than a year.
So has the pace of business investment, another key ingredient for the Massachusetts economy because of the state’s high concentration of firms that sell goods and services to other companies. The rate of US business spending fell by more than half between the first three months of the year and the next three months, from April to June, according to the Commerce Department.
National economic growth also sputtered, slowing from 4.1 percent at the end of 2011 to an anemic 1.3 percent in the spring. Massachusetts unemployment, meanwhile, began rising in July, increasing to 6.6 percent in October from 6 percent in June.
None of this is good news. But don’t blame the fiscal cliff, said Michael Goodman, a public policy professor at University of Massachusetts Dartmouth.
“Economic growth in 2012 has been slower than many of us anticipated,” Goodman said. “I suspect the administration is using the fiscal cliff as shorthand for all the things that are outside of their control.”
A year ago, state tax officials projected as much as $21.76 billion in tax revenues for the current fiscal year using estimates from three consultants — Moody’s Analytics, IHS Global Insight, and the New England Economic Partnership. After hearings and additional input from economists before the Legislature last December, the administration revised the projection upward to $21.95 billion, an increase of about $200 million.
On Monday, Patrick announced a $540 million shortfall and said the midyear budget gap is a “direct result” of economic uncertainty caused by the fiscal cliff, the combination of automatic federal spending cuts and tax hikes to go into effect in January unless Congress acts shortly.
Jay Gonzalez, Patrick’s budget chief, softened the fiscal cliff rhetoric the day after Patrick’s announcement, repeating the contention that the potential fiscal crisis was causing businesses to stand on the sidelines, but calling it one of several reasons for the revenue decline.
“It’s not the only factor,” Gonzalez conceded. “I think what the governor was saying is that uncertainty caused by the fiscal cliff has played a large part in the slowdown in economic growth.”
Careful observers of the state’s tax revenues said Gonzalez’s characterization still overstates the role of the fiscal cliff. The state, they said, just could not escape slowing national and global economies.
Michael J. Widmer, president of the Massachusetts Taxpayers Foundation, noted that the national economy grew at half the rate expected at the end of last year. Andre Mayer, senior vice president for research at Associated Industries of Massachusetts, the state’s largest employers’ group, noted the economic crisis in Europe and a slowdown in China’s booming economy.
Massachusetts exports to Europe during first nine months of 2011 fell by $1.1 billion, or 13.5 percent, compared with the same period a year ago, while exports to China dropped by 11 percent, or $177 million. “Those problems do have an impact on us here,” Mayer said.
Mayer described the governor’s tax estimates for this year as “not terribly rosy” but not “terribly cautious either.” While government spending was not extravagant, he said, the governor’s close personal ties to President Obama during an election that hinged on perceptions of the economy likely influenced the timing of the announcement of the shortfall.
Patrick “wasn’t going to be moaning about that in the days leading up to the election, talking about how the economy was weakening,” he said.
Gonzalez disputed that Patrick was trying to avoid blame for the state’s budget problems by citing the fiscal cliff, saying, “We are doing everything we can to try to help the Massachusetts economy grow,” he said.
But the shortfall will be felt broadly. Restrictions on state hiring mean 700 fewer state workers than the budget projected.