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State’s growth rate less than 1%

The Massachusetts economy deteriorated in the three months between April and June, as federal budget cutbacks and tax increases earlier this year undermined the state's expansion, according to a report by the University of Massachusetts and the Federal Reserve Bank of Boston.

Massachusetts' economy grew at annual rate of less than 1 percent during that period, lagging behind the US economy, which grew at a 1.7 percent rate during the same period, the Commerce Department reported Wednesday.

"I've never seen a report when the economy is supposed to be growing that's so somber," said Robert Nakosteen, an economics professor at the University of Massachusetts Amherst. "It's so deflating, in a way."


The estimates of Massachusetts' economic growth were reported in MassBenchmarks, a journal published by UMass. The state's economy has largely outperformed the nation's since the 2008 recession, but employers have slowed hiring in recent months. The unemployment rate in the state rose to 7 percent in June from 6.4 percent in March, while the national unemployment rate hovered at 7.6 percent during the same period.

The Commerce Department also revised downward its estimate of the nation's economic growth between January and March to 1.1 percent from 1.8 percent. As a result, UMass revised its estimates of first-quarter growth to 2.8 percent from an initially reported 3.4 percent.

Federal Reserve policy makers, meeting in Washington Wednesday, also acknowledged the recent slowdown, describing economic growth as modest, a slight downgrade from an earlier description as moderate. In a statement released after the meeting, policy makers said they would hold the Fed's benchmark short-term interest rate near zero and leave in place the $85-billion-a-month bond-buying program designed to keep long-term rates low.

Central bank officials expressed concern that if mortgage rates continued to rise, it could be a potential drag on the economy.


Local economists said the automatic federal budget cuts known as sequestration and broad increases in taxes that went into effect this year have slowed business activity and hiring in Massachusetts. The federal spending cuts have disproportionately affected the state because of its high concentration of federally funded defense and research programs at private companies, hospitals, and universities.

Improvements in the stock market and the Massachusetts housing market have helped offset some of the effects of these austerity measures. Boston area home prices increased 7.5 percent compared with the same time last year, according to the S&P/Case-Shiller Home Price Indices, the 11th consecutive month of year-over-year improvements.

Nationwide, home values ballooned in May, gaining 12.2 percent compared with the same month last year, according to the index.

Whether improving stock and housing markets are enough to sustain a recovery in the face of continued government cutbacks is unknown, the MassBenchmarks report said.

"It remains unclear as to whether the positive push represented by those factors driving state growth will be able to overcome the counterproductive pull of federal policy in the months to come," it read.

Northeastern University economics professor Alan Clayton-Matthews, who compiled and analyzed the state data, said a slowdown was expected after years of steady growth in the state.

There was essentially no job growth in Massachusetts between April and June, while the unemployment rate rose, he said. The rising jobless rate may be partly due to the way the unemployed are counted; people who have given up looking for jobs are not included in the unemployment rate until they resume their search. Once they enter or reenter the job market, it can push the unemployment rate higher.


Still, the rise in the unemployment rate is disturbing, Clayton-Matthews said, disproportionately affecting young workers and those without a high school diploma. In today's labor market, employers have their pick of prospective employees and can hire someone with a college degree, even for a position that typically does not require one, squeezing the least qualified candidates out of the market.

"Employers are just being extremely picky, and they can be about who they hire," Clayton-Matthews said. "It's the people at the bottom of the queue — youth and those with lower educational attainment — who are not able to get jobs."

Megan Woolhouse can be reached at mwoolhouse@globe.com.