Mass. Economy Still Outpacing US

The Massachusetts economy grew slightly faster than the nation as a whole at the end of last year, continuing a modest expansion despite the economic crisis in Europe and political crisis in Washington, the University of Massachusetts reported Wednesday.

In the the last three months of the year, Massachusetts economy grew at a 1 percent annual rate compared to a slight contraction in the US economy, due largely to a pullback in government spending as federal agencies awaited the outcome of the so-called fiscal cliff debate, which was ultimately resolved, before committing funds.

The state’s economic growth at end of the year continued the trend of the state rebounding from the last recession at a stronger pace that the nation as whole, largely on the strength of its strong technology industries. Over all of last year, entire year, the Massachusetts economy grew 2.1 percent, compared to 1.5 percent nationally.

Employment in the state grew 1.6 percent last year, compared to 1.4 percent nationally. This picture, however, could change as regular revisions to the data are made in coming weeks by statistical agencies.

The state growth rates were reported in MassBenchmarks, an economic journal published by the University of Massachusetts and Federal Reserve Bank of Boston. The US Commerce Department reported Wednesday that US economy shrunk in the last three months of the year at an annual rate of one-tenth of a percent, the first contraction since the first half of 2009.

The decline surprised many analysts, who forecast the national economy grew weakly at the end of last year. Uncertainty about whether Congress would avoid a scheduled combination of tax increases and deep spending cuts contributed heavily to the contraction, economists said.

Overall government spending in the fourth quarter fell at an annual rate of nearly 7 percent; defense spending plunged at a rate of more than 20 percent as the Pentagon held back contract award as it braced for possible budget cuts. Congress reached an 11th hour fiscal cliff compromise that settled tax questions but put off spending issues for a few months.

Economists, however, noted that activity in the private sector expanded. Consumer spending accelerated to a 2.2 percent annual rate in the fourth quarter from 1.6 percent in the third quarter. Business investment rebounded strongly. Spending by businesses on software and equipment, for instance, surged at annual rate of more than 12 percent in the fourth quarter after falling at a rate of nearly 3 percent in the third quarter.

Business investment is particularly important to Massachusetts, which has a high concentration of firms that sell goods and services, particularly technology products, to her firms. Even as consumers rebounded slowly from the last recessions, business spending has come back solidly, fueling Massachusetts’ recovery.

The UMass report projects that the state’s recovery will pick up speed over the next several months, expanding at the a 3.6 percent annual rate.

But Alan Clayton-Matthews, a Northeastern University economist and author of the report, warned that there are still reasons to be cautious about the outlook. For example, he said, wage and salary income declined somewhat in the last three months of the year, while consumer spending grew slowly.