Growth depends on feds

Policy affects state economy’s ability to keep outpacing nation

By Ira Kantor | The Boston Herald | January 31, 2013

A three-month “pause” in U.S. economic growth is no reason to panic, but lingering federal debt ceiling and budget woes must be addressed immediately to protect the Bay State’s economic future, experts said yesterday.

“Policy matters,” said Michael Goodman, a public policy professor at the University of Massachusetts at Dartmouth. “The commonwealth’s economic outlook is, to a troubling degree, dependent on the decisions that are being made in Washington in the coming weeks, and the recent track record for these institutions is not confidence-inspiring.”

The U.S. gross domestic product dropped at an annualized rate of 0.1 percent from October to December — the first shrinkage since 2009 — largely due to businesses not replenishing their inventories and defense spending cuts. Both factors slashed a combined 2.6 percentage points from GDP.

However, consumer spending and business investment both went up in this same time period, adding 1.5 and 1.1 percentage points to the GDP, respectively.

Last year, the economy expanded 2.2 percent overall compared to 1.8 percent in 2011.

Massachusetts, meanwhile, continues to outpace the nation, growing a modest 1 percent in the fourth quarter. The state could grow at an annualized rate of 3.6 percent over the next six months if Congress can avoid $1.2 trillion in automatic spending cuts and raise the debt ceiling.

Ken Kuttner, an economics professor at Williams College, added the large drop-off in defense spending was most likely a “one-off thing.”

“If there’s more of that, we’re in trouble,” he said. “We saw how that can put the economy in the red with just that one thing. If we saw more of that, we’d see more red ink.”

Yesterday, the Federal Reserve said it would keep buying $85 billion in Treasury and agency mortgage-backed securities a month, while keeping its short-term interest rate at an “exceptionally low” level until the unemployment rate falls below 6.5 percent. The government releases the jobs report for January tomorrow.

The Fed attributed the economic growth hiccup in large part to “weather-related disruptions and other transitory factors.” Others also placed some of the blame on Superstorm Sandy.

Inventory reductions could also be quickly fixed, added Northeastern University economist Alan Clayton-Matthews, who said Massachusetts could still outgrow the United States because of recent “turnarounds” in information technology products and semiconductor equipment.

“If the demand is there next quarter on behalf of consumers or business investors, then production will have to pick up to meet the demand and restore the inventories,” he said.

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