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Summary of testimony

Testimony for Hearings on FY 2008 Revenues Yolanda K. Kodrzycki Senior Economist and Policy Advisor Federal Reserve Bank of Boston Presented to: Massachusetts House and Senate Ways and Means Committees January 16, 2007. Summary of testimony.

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Summary of testimony

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  1. Testimony for Hearings on FY 2008 RevenuesYolanda K. KodrzyckiSenior Economist and Policy AdvisorFederal Reserve Bank of BostonPresented to:Massachusetts House and Senate Ways and Means CommitteesJanuary 16, 2007

  2. Summary of testimony • Massachusetts economy poised to show moderate output and income growth in CY 2007. • Projection premised on U.S. economy growing at or a little below its trend rate. • Housing sector will put a damper on overall U.S. and MA economic growth in CY 2007. • Labor force slowdown in MA poses longer-term uncertainties, but implications for revenue estimates not clear.

  3. U.S. economic outlook for CY 2007 • Moderate growth expected • 2006: GDP grew at approximately its potential (trend) 2007: growth expected to be similar or a little weaker • Energy prices • Recent declines boost real income and ease inflation • Housing market • Presents a challenge

  4. Weak housing market is slowing the economy Sales aredown, but they appear to be flattening… Thousands of units, annual rates Thousands of units, annual rates New single-family sales (left scale) Existing single-family sales (right scale) Construction has slowed significantly, and will continue to slow… Thousands of units, annual rates Single-family permits Single-family housing starts Source: Census Bureau.

  5. … until the large stock of unsold homes are purchased Ratio Months’ supply of new 1-family homes at current sales rate Nationwide, house prices have flattened. Dollars Index, 1980:Q1 = 100 250000 450.00 New Home Sales, Median Price (left scale) 225000 400.00 200000 350.00 175000 300.00 OFEHO U.S. House Price Index (right scale) 150000 250.00 2002:Q3 2003:Q1 2003:Q3 2004:Q1 2004:Q3 2005:Q1 2005:Q3 2006:Q1 2006:Q3 Source: Office of Federal Housing Oversight (house price index) and Census Bureau.

  6. Monthly employment growth consistent with growth in the labor force But the consumer remains upbeat Employment continues to expand steadily Thousands Thousands Total nonfarm employment (left scale) Private nonfarm employment (right scale) Recent job growth has been a bit above the rate consistent with maintaining full employment Change, 3-month moving average Total nonfarm employment average 3-month change Private nonfarm employment average 3-month change Source: Bureau of Labor Statistics.

  7. Strong job growth and declining energy prices are boosting real incomes Dollars per barrel Growth, previous 12 months Real disposable personal income (right scale) Domestic spot oil price (left scale) Sources: Wall Street Journal (oil) and Bureau of Economic Analysis (real DPI).

  8. Capital spending fundamentals remain reasonable Orders are running a bit ahead of shipments, suggesting modest investment growth $ Millions, SAAR Manufacturers’ new orders for nondefense capital goods excluding aircraft Manufacturers’ shipments of nondefense capital goods excluding aircraft Profits and productivity continue to promote investment Growth, previous 4-quarters Share of GDP Nonfarm productivity (left scale) Profit Share (right scale) Source: Census Bureau (top panel) and Bureau of Economic Analysis (bottom panel).

  9. Financial conditions remain supportive Broad stock price indexes are up over the past year Index, 6/1/2006 = 1.0 Dow Jones Industrial Average S&P 500 Wilshire 5000 And the 10-year Treasury remains below 5%, with corporate yields maintaining recent spreads Percent 7-10 year Investment grade corporate yield 10-year Treasury rate, constant maturity Sources: Wall Street Journal (Dow Jones and Wilshire), Standard and Poor’s (S&P 500), Board of Governors of the Federal Reserve System (treasury yield) and Merrill Lynch (Corporate yield).

  10. Massachusetts economic conditions • Employment recovery has been only so-so… -Since recession low point, MA has added 56,000 jobs, or 1.8 percent (vs. 4.8 percent nationally). • But personal income growth is now on track. • And forward-looking indicators point to solid economic growth for CY 2007.

  11. Massachusetts’ job growth has been up and down on a monthly basis, but fairly steady year-over-year. Monthly Employment Change in Massachusetts, Thousands of Jobs Employment: Percent Change from Year Earlier United States Massachusetts Note: Gray shaded area indicates 10 and 90 percentile boundaries for the 50 states. Source: U.S. Bureau of Labor Statistics. Source: U.S. Bureau of Labor Statistics

  12. Sectors with highest job gains: education & health services,professional, scientific & business services,financial activities. Employment by Industry: Percent Change, Nov 2005 – Nov 2006 Source: Bureau of Labor Statistics

  13. MA real personal income now rising at almost the same pace as national. Real Personal Income: Percent Change from Year Earlier Massachusetts United States Note: Gray shaded area indicates 10 and 90 percentile boundaries for the 50 states. Source: Bureau of Economic Analysis. Source: Bureau of Economic Analysis

  14. Forward-looking indicators such as AIM business confidence and U Mass leading index are solidly in positive territory. Predicted growth over next six-months Readings above 50 are generally optimistic AIM Business Confidence (right scale) U Mass Leading Index (left scale) Source: Associated Industries of Massachusetts and the University of Massachusetts.

  15. Massachusetts housing sales and constructionhave slowed. Thousands of units, annual rates Existing single-family sales Housing units, seasonally adjusted Single-family permits Source: Census Bureau.

  16. Home price appreciation has downshifted: MA house prices fell in the 2nd and 3rd quarters. Repeat Sales Home Price Index: Percent Change from Year Earlier Massachusetts United States Note: Gray shaded area indicates 10 and 90 percentile boundaries for the 50 states. Source: Office Of Federal Housing Enterprise Oversight

  17. Foreclosures have risen in recent months, especially in subprime market. Foreclosures initiated in quarter, as a percent of loans in pool. United States Massachusetts Source: Mortgage Bankers Association

  18. Construction accounts for a relatively small share of the MA economy. Source: Bureau of Labor Statistics

  19. Recovery in commercial real estate markets may provide a boost to offset softer housing. Office Vacancy Rates, Downtown Office Vacancy Rates, Suburban United States United States Boston Boston Adjusted Asking Rent per S/F, Downtown Adjusted Asking Rent per S/F, Suburban Boston Boston United States United States Note: Shaded areas indicate 10 and 90 percentile boundaries for 60 selected metropolitan areas. Sources: National Real Estate Index, CB Richard Ellis.

  20. The MA labor force has not grown since 2000-- constraint on future job growth? Index, 1996 = 1.00 US MA MA, adjusted for cross-state commuting** *2006 annual average estimated as average of January-October seasonally adjusted data. **Assuming zero net in-commuting in 1996, then increasing gradually to 60,154 in 2004. Source of 2004 net in-commuting estimate: Massachusetts Institute for a New Commonwealth. Mass Economy: the Labor Supply and Our Economic Future, Table 8, page 38. Source: Bureau of Labor Statistics

  21. Concerns focus on loss of 25- to 44- year olds. Source: Census Bureau

  22. For FY 2008+ revenue estimates: • LF slowdown • is occurring nationwide • may not constrain income growth. Source: Bureau of Labor Statistics

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