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Economists hopeful, but wary on Mass. economy

Bob Salsberg

A stabilizing real estate market, improving business and consumer confidence, lower unemployment and higher state tax collections suggest the state’s economy is heading into the new year behind a growing head of steam.

Economists, however, are wary, reminding revelers that national and global developments could lend a great deal of uncertainty to 2010.

“We’re not getting out of the woods,” said Frederick Breimyer, a former chief economist for State Street Bank. “We’re just going to a different part of the woods.”

The new year will be a test of whether enough has been done for the economy to re-ignite and maintain its own momentum, he said.

In Massachusetts, at least, the dismal drumbeat of bad economic news that characterized much of the recession turned to a slightly brighter rhythm in 2009’s final quarter.

The Massachusetts Association of Realtors reported a 63.1 percent increase in sales of single-family homes in November compared with the same month in 2008, spurred by a first-time homebuyer tax credit. A 15 percent increase in pending sales – homes under purchase and sales agreements not yet closed – indicates that the healthy sales volume could continue.

After rising steadily for 2 1/2 years, the unemployment rate in Massachusetts dropped in October and November to stand at 8.8 percent, still high but more than a full point below the national average.

Business confidence, measured by Associated Industries of Massachusetts, has risen in eight of the past nine months. The state Department of Revenue reported a slight increase in withholding tax collections in November, and an even bigger jump in sales tax collections, the latter at least partly due to the 25 percent increase in the state’s sales tax as of Aug. 1.

If nothing else, positive reports such as these can have a powerful psychological effect.

“As long as people who have jobs feel reasonably confident that the economy isn’t going to hell in a handbasket … those people who are employed, if they’re breathing easy, might eventually stick their toes in the real estate market,” said Timothy Warren, head of the Warren Group, a publisher of real estate data in Massachusetts.

Warren said 2009 could well be the first year since 2005 that single-family home sales will exceed those of the previous year. He also points to a leveling out of prices after years of steady declines that discouraged many homeowners from putting their properties on the market.

But the news isn’t all good. The Warren Group this week reported a 45 percent increase in foreclosure petitions in November, a sign that many Massachusetts residents are still struggling to make mortgage payments.

“I think we’re going to continue to see foreclosures be a problem throughout next year,” Warren said.

A potentially bigger problem is the state’s ongoing fiscal predicament. While the budget crisis in Massachusetts has not been as severe as in some states, analysts see a possible $3 billion deficit dampening economic growth.

“We’re in for a very tough fiscal 2011 (starting July 1) and I think that’s going to lead to major layoffs in cities and towns around the state,” said Michael Widmer, president of the business-backed Massachusetts Taxpayers Foundation.

Even if tax collections improve, the state continues to have a structural deficit and cannot rely on federal stimulus funds and other one-time revenues that helped bail out the previous budget, Widmer said. And the fact that 2010 is an election year – with heated races for governor and other state offices expected – could “complicate things immeasurably.”

“The problem with the state and local fiscal situation is that the state is falling behind on maintaining infrastructure and improving the public education system,” said Alan Clayton-Matthews, associate professor of public policy and public affairs at University of Massachusetts-Boston.

“And municipalities are finding it more difficult to provide the level of services that give them a quality of living that attracts people,” he said.

For those and other reasons, economists are reluctant to place Massachusetts on the leading edge of a national recovery. But they point out that that because of some of the state’s unique strengths, the downturn was shorter and less severe than in many other places.

“We did not suffer disproportionately in terms of this recession, in fact we have done comparatively a little bit better by most indicators than the nation,” Breimyer said.

Clayton-Matthews credited the state’s “industrial mix, particularly technology and knowledge-based sciences and services.”

(Associated Press)