Testimony for Hearings on FY 2010 Revenues

Yolanda K. KodrzyckiSenior Economist and Policy Advisor

Federal Reserve Bank of Boston

Presented to:

Massachusetts House and Senate Ways and Means CommitteesDecember, 2008

2

-6

-5

-4

-3

-2

-1

0

1

2

3

4

Oct-90 Oct-92 Oct-94 Oct-96 Oct-98 Oct-00 Oct-02 Oct-04 Oct-06 Oct-08

Massachusetts employers have added virtually no net new jobs in the past 12 months.

Year-over-year Employment Growth

United States

Massachusetts

United States:Last 12 months: -0.9%1974-2007 trend: +1.7%Since trough: +5.5% + 7,077,000 jobs

Massachusetts:Last 12 months: +0.1%1970-2007 trend: +1.0%Since trough: +3.3% + 105,300 jobs

3

3000

3050

3100

3150

3200

3250

3300

3350

3400

Oct-98 Oct-99 Oct-00 Oct-01 Oct-02 Oct-03 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08

MA payroll employment is down 11,000 jobs since the August peak. Of that net decrease, 10,000 came in September and October.

Number of jobs in thousands

4

In Q1 and Q2, MA personal income was about 5% above year-ago. Q3 and especially Q4 will be worse because of job losses.

-5

0

5

10

15

90Q2 91Q2 94Q2 96Q2 98Q2 00Q2 02Q2 04Q2 06Q2 08Q2

Year-over-year Personal Income Growth

United States

Massachusetts

Source: U.S. Bureau of Labor Statistics.

5

Source: U.S. Bureau of Labor Statistics.

Employment Growth by SectorPercent Change, October 2007 – October 2008

(Seasonally Adjusted)

The construction and real estate services sectors have had the largest percentage job decreases over the past year.

0.8

-1.8

0.7

-0.3

-0.4

-4.7

1.2

1.3

2.3

-0.2

-0.4

0.6

-1.5

-4.4

-8.0 -7.0 -6.0 -5.0 -4.0 -3.0 -2.0 -1.0 0.0 1.0 2.0 3.0

Construction

Manufacturing

Wholesale Trade

Retail Trade

Transportation

Information

Finance & Insurance

Real Estate

Professional & Business Services

Education

Healthcare

Leisure and Hospitality

Other Services

Government

6

Source: U.S. Bureau of Labor Statistics.

Employment Growth by SectorChange, October 2007 – October 2008

(Seasonally Adjusted)

Construction, retail, and manufacturing have lost the largest numbers of jobs. Healthcare and professional & business services have added the most jobs.

2500

-500

-500

10,700

2000

6000

-2000

-800

-300

600

1100

-6200

-4400

-6000

-10000 -5000 0 5000 10000

Construction

Manufacturing

Wholesale Trade

Retail Trade

Transportation

Information

Finance & Insurance

Real Estate

Professional & Business Services

Education

Healthcare

Leisure and Hospitality

Other Services

Government

7

Forward-looking measures are negative about the MA economy.

-4

-2

0

2

4

6

8

Nov-00

May-03

Nov-03

May-03

Nov-03

May-03

Nov-03

May-04

Nov-04

May-05

Nov-05

May-06

Nov-06

May-07

Nov-07

May-08

Nov-08

38

44

50

56

62

68

74

U Mass Leading Index (Left Axis)

AIM Business Confidence (Right Axis)

Source: Associated Industries of Massachusetts and the University of Massachusetts.

8

MA housing sales seem to have stabilized at a low level.Temporary response to foreclosure sales?

90

100

110

120

130

140

150

160

1997Q3 1998Q3 1999Q3 2000Q3 2001Q3 2002Q3 2003Q3 2004Q3 2005Q3 2006Q3 2007Q3 2008Q3

4000

4500

5000

5500

6000

6500

7000

7500

8000

Total Existing Home Sales (thousands of units)

Source: National Association of Realtors.

United States(right scale)

Massachusetts(left scale)

9

60

70

80

90

100

110

2003Q3 2004Q3 2005Q3 2006Q3 2007 Q3 2008 Q3

Massachusetts home prices are down from a year ago.Boston area decrease is much smaller than in other large urban areas.

Massachusetts

United States

FHFA Index (peak=100)

Source: OFHEO, S&P/Case-Shiller.

60

70

80

90

100

110

Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08

Composite of 20 large metropolitan areas

Boston areaS&P Case-Shiller Index (peak=100)

Percent change from a year ago

United States -4.0

Massachusetts -4.8

Composite 20 -17.4

Boston -5.7

Percent change from a year ago

10

0

0.2

0.4

0.6

0.8

1

Q3-03 Q3-04 Q3-05 Q3-06 2007 Q3 2008 Q3

Foreclosures Started, All LoansForeclosures initiated in quarter, as a percent of loans in pool.

Source: Mortgage Bankers Association / Haver Analytics

Seriously Delinquent MortgagesMortgages with payments 90 days past due plus inventory of mortgages in foreclosure, as a percent of loans in pool.

0

1

2

3

4

5

6

Q3-03 Q3-04 Q3-05 Q3-06 Q3-07 Q3-08

Workouts and moratoria are holding down foreclosure rate. The serious-mortgage-delinquency rate continues to rise.

United States

United States

Massachusetts

Massachusetts

11

Subprime ARMs remain the most troublesome category, but serious delinquencies are much higher than historical norms for all categories

of mortgages.

0

5

10

15

20

25

30

35

Q3-03 Q3-04 Q3-05 Q3-06 Q3-07 Q3-08

Prime FRM Prime ARMSubprime FRM Subprime ARM

Seriously Delinquent Mortgages by Type of Loan in Massachusetts(as a percent of loans in pool)

12

Federal Reserve officials downgraded their U.S. economic forecasts in October. New data are leading to further downgrades.

Source: Federal Open Market Committee, Summary of Economic Projections for the Meetings of June 2008 and October 2008. Table shows central tendencies among the Federal Reserve Board governors and Federal Reserve Bank presidents.

Note: Projections are fourth-quarter–to- fourth-quarter growth rates except for the unemployment rate, which is the fourth quarter level.

CY 2008 Q4

CY 2009 Q4

CY 2010 Q4

Real GDP growth (%)

Jun-08 1.0 to 1.6 2.0 to 2.8 2.5 to 3.0

Oct-08 0.0 to 0.3 -0.0 to 1.2 2.3 to 3.2

Unemployment rate (%)

Jun-08 5.5 to 5.7 5.3 to 5.8 5.0 to 5.6

Oct-08 6.3 to 6.5 7.1 to 7.6 6.5 to 7.3

PCE inflation (%)

Jun-08 3.8 to 4.2 2.0 to 2.3 1.8 to 2.0

Oct-08 2.8 to 3.1 1.3 to 2.0 1.4 to 1.8

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Implications for Massachusetts revenue projections.

• Incoming economic data indicate that revenues are likely to weaken further in the 2nd half of FY 2009.

• FY 2010 depends on the effectiveness of monetary and fiscal stimulus.

• Monetary and fiscal policies affect the economy with a lag.

• FY 2010 revenues will definitely be sub-par. Hard to project the size of the FY 2010 revenue problem.