Stabilizing financial markets and continued strong employment were not enough to brighten the outlook of Massachusetts employers during January as business confidence fell for the fifth time in seven months.
The Associated Industries of Massachusetts Business Confidence Index (BCI) lost 0.9 points to 57.7, its lowest level since October 2016. Confidence has dropped 6.4 points during the past 12 months.
The retreat was led by a 7.3-point drop in employer views of the Massachusetts economy, and a 2.4-point drop in opinions about the national economy.
Overall confidence remains within optimistic territory, but every element of the AIM Index is now lower than it was a year ago.
A separate survey within the January Business Confidence Index found that while 71 percent of Massachusetts employers have seen some effect from the US government’s imposition of tariffs on goods form China and other nations, only 10 percent of companies characterize the effect as “significant” or a threat to the existence of their business.
The most common consequence of the tariffs has been an increase in raw-material prices, followed by changes to the supply chain, supply interruptions, products affected by retaliatory tariffs and loss of overseas customers.
“The Massachusetts economy grew at 2.1 percent during the fourth quarter of 2018 and continues to operate at near full capacity,” said Raymond G. Torto, Chair of AIM’s Board of Economic Advisors (BEA) and Lecturer, Harvard Graduate School of Design.
“At the same time, employers continue to confront uncertainty surrounding trade policy, demographic constraints on the labor market and the implementation of a sweeping paid family and medical leave program in Massachusetts.”
The AIM Index, based on a survey of Massachusetts employers, has appeared monthly since July 1991. It is calculated on a 100-point scale, with 50 as neutral; a reading above 50 is positive, while below 50 is negative. The Index reached its historic high of 68.5 on two occasions in 1997-98, and its all-time low of 33.3 in February 2009.
The Index has remained above 50 since October 2013.
The constituent indicators that make up the overall Business Confidence Index were mixed during January.
The 7.3-point drop in the Massachusetts Index assessing business conditions within the commonwealth left that indicator at 57.4. Confidence in the Massachusetts economy has declined 11.5 points since January 2018.
The U.S. Index measuring employer sentiment about the national economy dropped 2.4 points to 52.7, a decline of 12.1 points year-over-year. It marked the lowest reading for the U.S. Index since November 2016.
The Current Index, which assesses overall business conditions at the time of the survey, fell 1.8 points to 58.2. The Future Index, measuring expectations for six months out, remained flat at 57.3 but has declined 9.3 points over 12 months.
Manufacturers (57.8) and non-manufacturers (57.7) were equally confident. There was also little difference in the confidence readings reported by large companies (57.9), medium-sized companies (57.7) and small companies (57.6). Companies in Eastern Massachusetts (59.4) were more bullish than those in the west (55.3).
Economist Barry Bluestone, retired Professor of Public Policy and Urban Affairs at Northeastern University and a member of the BEA, suggested that employers face two parallel sets of challenges – uncertainty about political issues such as tariffs and a more fundamental uncertainty about the limits of a full-employment state economy. He noted that wage and salary income growth was strong in the fourth quarter, rising 7.2 percent in Massachusetts on an annualized basis.
“A 3.3 percent unemployment rate, combined with an aging population and slow labor force growth will challenge the ability of Massachusetts employers to expand during 2019 and beyond,” Bluestone said.
Piling On Costs
AIM President and CEO Richard C. Lord, also BEA member, said the significant weakening of confidence in the Massachusetts economy also reflects frustration among employers with a cascade of expensive new state mandates, including a two-year MassHealth assessment, an increase in the minimum wage and the impending start of paid family and medical leave.
“We hear frequently from Massachusetts employers who feel under siege from both the sheer expense of these programs and the administrative burden they place on companies, particularly smaller companies,” Lord said.
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