State Economy Grows Just 1 Percent in Q4

Economic growth in the state sputtered along at 1 percent during the fourth quarter, according to a report released Wednesday by MassBenchmarks, a journal of the state economy published by the University of Massachusetts’ Donahue Institute in collaboration with the Federal Reserve Bank of Boston.

While that was better than the national fourth-quarter report, which found that the national economy contracted by 0.1 percent, some local experts agree many of the same variables affected both entities. At the top of that list is the biggest quarterly decline in federal defense spending in 40 years.

“The quarterly report reflects what companies were doing during the run-up to sequestration,” said Christopher Anderson, president of the Massachusetts High-Technology Council, in reference to congressional negotiations regarding the federal budget deficit. “There was a lot of uncertainty, so deals weren’t getting done.”

“We dodged a major bullet with the fiscal cliff, but as we all know, it’s a temporary diversion,” added David Tibbetts, president of the North Andover-based Merrimack Valley Economic Development Council, speaking of the temporary deal reached New Year’s Day that raised taxes on those earning more than $400,000 — but offered no federal spending cuts. “There’s a lot more work to do.”

Earnings reports from local companies with defense operations suggest caution is in order until there is firmer resolution. Chelmsford-based Mercury Systems Inc., which makes clustered computer systems for the military, reported that revenues in its Advanced Computing Solutions unit declined by 29 percent, from $66.1 million in the fourth quarter of 2011 to $46.7 million last quarter. All of the decline is attributed to reduced defense spending, officials said during their quarterly conference call Tuesday.

Perhaps in anticipation of the slowdown, Mercury announced in October that it had cut 142 jobs.

On Monday, British defense contractor BAE Systems announced it was cutting 200 jobs from its southern New Hampshire operations, also citing defense spending concerns.

Alan Clayton-Matthews, senior contributing editor for MassBenchmarks and an associate professor of economics at Northeastern University, suggested the state report isn’t as bad as it looks. While acknowledging Massachusetts “could be affected by more than the typical state,” when it comes to defense-spending declines, it depends on what areas in the defense budget are frozen.

“One thing that counter-balances that is the increase in investments for information processing and software technology,” Clayton-Matthews said. “Those are areas that are more concentrated in our state than in the nation as a whole, so that’s better for us.”

Clayton-Matthews also said the slow statewide growth could be attributed to a “disconnect” between figures showing fairly strong growth in total employment but weaker production growth.

“If both of those are true, it means employers have hired but employees are sitting on their hands,” he said, adding that it’s possible there were calculation errors and that “we may have overestimated employment.”

For the year, MassBenchmarks estimates that the state’s economy grew by about 2.1 percent, again outpacing the U.S., which grew just 1.5 percent.
MassBenchmarks predicts faster growth for 2013. It reported that its leading index, a forecast of the growth in the current index over the next six months, was an annualized rate of 3.6 percent.

But if the government fails to reach a more widespread budget agreement, all bets would seem to be off. The Department of Defense is currently operating under a continuing resolution that limits line-item spending to 2012 levels. And Congress has a March 1 deadline to reach a budget agreement to avoid “sequestration,” the term used for automatic spending cuts that include $500 billion in across-the-board cuts to defense spending.

Anderson, a Westford resident, noted that the government had already previously agreed to trim $487 billion from defense spending this decade.
“In any government, inefficiencies can be found,” he said. “On the defense side, it’s important to examine the priorities and allocate spending according to those priorities.”

He cited defending cybernetworks from cyber-terrorists as a top priority.

“That ought to be reflected as Congress tries to come up with a solution,” he said. “What we don’t want to see is an arbitrary, across-the-board cut in defense spending.

A key economic engine for the region is Hanscom Air Force Base, which has a workforce of more than 5,800 people, all but 1,000 of them either civilians or contractors. Earlier this month, in response to a $1.8 billion shortfall in Air Force funding, senior leaders directed a force-wide hiring freeze among other workforce actions in a memorandum sent to senior commanders Jan. 16, according to Air Force News Service.

“I will say this: The fourth quarter will be just the tip of the iceberg (if Congress doesn’t come to a budget agreement),” Anderson said.
Tibbetts was a bit more optimistic. “The good news is that the election is over and that politicians are starting to see that compromise is not a dirty word anymore.”