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Business Confidence Weakens in July

Posted on August 3, 2020

Confidence among Massachusetts employers weakened during July after two months of gains as the COVID-19 pandemic shrank the US economy at a 33 percent annual clip during the second quarter.

The Associated Industries of Massachusetts Business Confidence Index (BCI) fell 3.2 points to 45.8, indicating a predominantly pessimistic outlook among businesses throughout the commonwealth. Confidence was 16.2 points less than in July 2019.

The decrease, which came four months after the index suffered the largest one-time decline in its history, reflected concern among employers that surging COVID-19 cases in other parts of the country could eventually spell a prolonged and uneven national economic recovery.

Employers, in fact, showed significantly more confidence in the prospects of the Massachusetts economy than the national one – the Massachusetts Index portion of the BCI rose 2 points in July while the National Index tumbled 6.5 points.

“Businesses continue to face uncertainty around both the public-health crisis and the economic crisis brought about by shutdowns and stay-at-home orders,” said Raymond G. Torto, professor at the Harvard Graduate School of Design and Chair of the Board of Economic Advisors.

“The uncertainty will only intensify as cities and towns debate what to do about opening schools in September.”

The AIM Index, based on a survey of more than 140 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.

Constituent Indicators

The constituent indicators that make up the Business Confidence Index were mostly lower during July.

Employers’ confidence in their own companies fell 4 points to 47.6 after moving into optimistic territory the previous month for the first time since the COVID shutdown.

The gain in the Massachusetts Index assessing business conditions within the commonwealth brought it to 48.8, 19.4 points lower than a year ago. The US Index measuring conditions nationally ended the month at 37.2, losing 25.4 points during the past 12 months.

The Current Index, which assesses overall business conditions at the time of the survey, slid 4.3 points to 42.0. The Future Index, measuring expectations for six months out, dropped 2.2 points to 49.6.

The Employment Index declined slightly – 0.5 points to 47.7 – while the Sales Index, a leading indicator, declined 9.1 points to 42.6 points.

Manufacturing companies (46.7) were more confident than non-manufacturers (44.8). Medium-sized companies (46.9) were more optimistic than small companies (45.9) or large companies (44.1). Companies in western Massachusetts (46.3) were more upbeat than those in the east (45.3).

Katherine A. Kiel, Professor of Economics at the College of the Holy Cross and a BEA member, said employers continue to face headwinds in a Massachusetts economy that declined at a staggering 43.8 percent annual rate during the second quarter.

“The pandemic affected Massachusetts and other northeastern states early and severely during the second quarter so it’s not surprising that Massachusetts now has the highest unemployment rate in the nation at 17.4 percent. September will mark a critical juncture in the recovery as we see how many students return to college campuses and how schools handle the start of classes,” Kiel said.

Stabilizing the Unemployment System

AIM President and CEO John R. Regan, also a BEA member, said a key factor for Massachusetts employers moving forward will be the willingness of the federal government to provide financial support to the commonwealth’s struggling unemployment insurance system.
Projections from the most recent Unemployment Trust Fund Outlook Report estimate the fund will run a $6.6 billion deficit over the next several years. Employer contributions are due to increase from $1.6 billion this year to $2.2 billion in 2021.

“AIM strongly supports measures that will stabilize the unemployment insurance system and moderate potential unemployment tax increases for employers already struggling to keep their doors open,” Regan said.