Why New England's economy won't recover soon


An Unrelenting Slump. New England ushered in America's recession, but it will not lead the way to recovery. The current slump in Massachusetts, the region's hardest-hit area, began in 1988 and shows no sign of abating. In March, the state's unemployment rate reached 9.7 percent, almost 3 percentage points above the national average of 6.8 percent. The Massachusetts Miracle turned into the Massachusetts Debacle in a hurry. Only four years ago, the state had an unemployment rate of just 2.3 percent -- more than 3 percentage points below the U.S. average. New England's real-estate collapse, the market's move from mini-to personal computers and post-Reagan defense cutbacks have all contributed to the region's economic downfall. Most analysts thought that a Texas-style boom-and-bust cycle could never wound New England's sophisticated economy, which is based on high technology, services and education. But they were obviously wrong. Any region in the country that experiences financial and economic excess, no matter how diverse its base, is vulnerable to a severe downturn.

Many people blame New England's decline on bloated, inefficient government. The inability of the region's states to prune their budgets certainly contributed to a loss of public confidence and worsened the current recession. But that's only part of the story. The roots of New England's slump lie in its earlier success. In 1975, the region was depressed because traditional textile and shoe industries were taking a beating from competition in the South and in the Third World. Massachusetts manufacturing employment in 1975 dropped to 16 percent below its 1967 level, and the state's unemployment rate rose to 11.2 percent, far above the national average.

Economic health gradually returned as the region harnessed skilled labor and established profitable niches in high technology and services. The steady growth of the late 1970s shifted into high gear during the early 1980s. As computers became more powerful, business moved from IBM mainframes to minicomputers made by such New England firms as Digital Equipment. The high-tech boom created demand for software, another regional specialty. And Washington's Pentagon buildup led to big orders for defense firms like Massachusetts-based Raytheon, manufacturer of the Scud-busting Patriot antimissile system.

False Prosperity. But New England's solid economic growth gave way in the mid-1980s to a false prosperity. Real-estate speculation led to a runaway building boom, which created jobs for bankers, construction workers, real-estate agents, lawyers and architects. In the overheating economy, housing prices shot up -- doubling from 1983 to 1987 -- and wages of unskilled workers soared to $ 6 or $ 7 an hour. Rising costs made New England's manufacturing sector increasingly uncompetitive; indeed, manufacturing employment peaked in 1984 and then rapidly declined. Meanwhile, scores of buildings were being erected to serve an expanding economy. But by 1986, New England's growth was slowing, and construction was the region's primary source of economic energy. Three years later, with banks choking off lending, New England tumbled into a brutal recession, months before the rest of the country.

New England's recovery will take time. Ultimately, the region's highly skilled labor and its concentration of universities will foster a comeback in high technology. But it will be years before the business that was lost in the 1980s is regained. And with the vacancy rate in Boston's central business district still hovering at 17.5 percent, the overbuilt commercial real-estate market will be hurting for a decade.

Regional Breakdown. What does New England's sad tale mean for the United States as a whole? Probably not a lot. The Federal Reserve Board, through its control of interest rates, can smooth out boom-bust cycles -- raising rates when the nation's economy is overheating and cutting them when there is a slump. The real moral of this regional breakdown is how useful it is to have a central bank that is not afraid to use its power.

Mounting unemployment

Joblessness in Massachusetts dwarfs the U.S. unemployment rate.

Unemployment rate

U.S. Mass.

1980 6.2 pct. 5.0 pct.

1981 7.2 pct. 5.7 pct.

1982 8.9 pct. 7.1 pct.

1983 10.2 pct. 7.5 pct.

1984 7.6 pct. 5.2 pct.

1985 7.1 pct. 4.1 pct.

1986 7.0 pct. 3.7 pct.

1987 6.5 pct. 3.8 pct.

1988 5.6 pct. 3.0 pct.

1989 5.0 pct. 3.4 pct.

1990 5.2 pct. 5.4 pct.

1991 6.8 pct. 9.7 pct.


Soaring prices

Boston's overheated real-estate market and soaring wages pushed inflation above national levels.

Consumer price index, all items (1982-84=100)


1980 80.6 80.1

1981 90.2 88.6

1982 92.8 94.7

1983 98.6 98.1

1984 103.9 102.9

1985 108.2 106.8

1986 111.8 109.1

1987 115.9 112.4

1988 122.1 116.7

1989 129.7 122.5

1990 136.3 128.9

1991 143.9 135.0

Shifting economy

Less stable construction jobs replaced industrial employment as New England's economic engine.

N. England manufacturing and construction jobs as percent of U.S. employment


Manufacturing Construction

1981 100.0 100.0

1982 94.6 95.3

1983 90.1 96.8

1984 93.5 96.4

1985 89.2 103.0

1986 85.0 112.3

1987 81.7 120.5

1988 76.8 127.5

1989 72.4 116.5

1990 67.9 102.4

Note: CPI and unemployment figures are for March.

Originally published, 5.20.91