APRIL 11, 2025……Between market dips, involved state officers and worldwide commerce implications, the tariff insurance policies applied and now partly paused by President Donald Trump this week have created widespread fear throughout Massachusetts and the nation.
Dr. Alan Clayton-Matthews, longtime financial coverage analyst, senior contributing editor of financial publication MassBenchmarks, and affiliate professor emeritus of economics and public coverage at Northeastern College, is watching numerous indicators as markets fluctuate and the state mulls over coverage and funding responses to the Trump administration.
In a latest dialog with the Information Service, Clayton-Matthews spoke about potential tariff implications on Massachusetts, to what diploma he thinks budget- and policy-makers ought to reply, and the way market fluctuations play into his takeaways from the primary months of Q1.
This interview has been edited and condensed for readability and size.
Q: How have you ever been navigating the ups and downs of this week’s tariff coverage?
A: I’ve been watching the markets, that’s very easy to do. However I’ve been following different financial indicators as properly. The AIM Enterprise Confidence Index came out [this week], that was down, and the measures of client confidence — there are two, one in Michigan and one is the Convention Board, these have each been down. The uncertainty is talked about in every single place.
Q: Lawmakers and economists have been very alarmed about tariffs initially — then there was a pause on most of them and the markets rose once more. How can that form of uncertainty affect the long-term outlook of the state’s financial system and financial coverage?
A: The uncertainty impacts state coverage the identical approach it impacts companies. It’s actually troublesome to plan. It’s going to be troublesome to assemble the finances for the approaching fiscal yr, as a result of it’s exhausting to know what the impacts can be on federal sources of funding. It’s exhausting to understand how a lot the financial system will decelerate. If there’s a recession, that has a huge effect on state revenues, and the markets even have a huge effect on state revenues. The earnings tax, and the surtax on the earnings tax, are very delicate to the market. For the previous couple fiscal years, together with this one, the surprises have been on the upside — markets have been robust and revenues have been coming in increased than anticipated.
However for the subsequent fiscal yr, it may very well be the alternative. If the inventory market continues being down, the earnings tax revenues will fall accordingly. Capital features revenues will fall. Surtax earnings receipts will fall. The [uncertainty] has additionally not been good for tech and different knowledge-based providers, [which] pay excessive salaries and are essential for our tax base. The commerce conflict can have an effect on that in a number of unhealthy methods. It might result in a nationwide recession — that can have an effect on Massachusetts. We’ve got quite a lot of commerce with Canada, together with power. And to the extent that nations battle the [trade] conflict and battle again, we now have a surplus within the U.S. within the provide of providers to different nations, and the hit again is more likely to largely are available in affecting our providers exports.
Q: Any potential positives?
A: There’s one factor on the upside. One polar consequence of this commerce conflict is that offers do get made and tariffs get lowered worldwide — decrease than they have been earlier than this all began. That might be a superb factor for the USA and the world financial system. That’s one pole of an consequence. The opposite pole of the tariff conflict is that the U.S. builds tariff partitions in opposition to commerce with the remainder of the world. That might be the worst consequence, as a result of it might go away us very remoted. The U.S. is 25% of the worldwide financial system by way of GDP, and if we lock out the opposite 75% of the world financial system and provide ourselves with the whole lot we’d like, costs will go up, high quality will go down, and the usual of residing will fall. That’s a long-term outlook in a worst-case state of affairs.
One of the best-case state of affairs will make us a bit higher off than we have been earlier than. The worst-case state of affairs is an actual nightmare that may have an effect on the nation’s financial progress and prosperity for a very long time. So it’s a really unbalanced set of outcomes. What’s more likely to occur is one thing in between, which isn’t good.
Q: On the peak of the crash this week, some economists urged Massachusetts lawmakers downgrade their income expectations instantly; some urged they proceed in onward and pause later to judge. The place do you stand in that realm of recommendation?
A: “Moderation in modifications” could be my recommendation. We do have a wet day fund, and it’s received quite a lot of assets in it. And with the surtax, we additionally produce other funds to assist with transportation and training, which may function wet day sources as properly. There’s a distinct risk that Trump’s insurance policies can be reversed if Congress stands up, and if, typically, individuals get up. If the colleges stand as much as Trump — and it appears to be like like they might be taking that path — and if Congress takes the reins over commerce coverage, that can forestall a catastrophe. So it’s not written in stone that we’re going to be in tough form subsequent fiscal yr. There’s rather a lot to maintain observe of, however I’m cautiously optimistic that the worst goes to be prevented. That’s going to take pushing again in opposition to the rhetoric and threats of the federal administration.
Q: For those who’re a state finances author, and also you’re watching this all go down as your finances is contingent on a secure financial system and sufficient federal funding, how are you going about planning for that?
A: I wouldn’t reduce applications and providers now. I might simply postpone that, as a result of we do have assets to fill in gaps if wanted. There are prices to reducing applications which have advantages, relative to protecting them the place they’re. For instance — any cuts to Okay-12 or pre-Okay training, or to high schools and universities would in all probability be unhealthy to make, as a result of they damage not solely the present state of affairs however future progress as properly. Cuts to issues like early training and baby care, I feel, would even be one thing that I might attempt to keep away from, as a result of we now have a small labor power progress as it’s, and people applications assist help moms and dads being within the labor power, with the ability to work and to afford baby care.
Q: Does this financial panorama remind you of or replicate another occasions you’ve researched or studied?
A: Sure, it does remind me of issues. However in a approach, Trump is all the time saying he’s an outlier, and that is an outlier state of affairs. I don’t suppose that there’s been any motion concerning commerce coverage that has been as large and disruptive as this — even the Smoot-Hawley tariffs within the ’30s have been much less, so that is unprecedented in scope. However there have been some parallels with regard to immigration and DEI coverage with the previous over McCarthyism and the communist scare of the ’50s. These parallels are the concern that’s put into individuals and the hate that outcomes, and that ended by individuals lastly standing as much as McCarthy, and McCarthy form of self-annihilating. It grew to become clear after some time that what he was spewing wasn’t factual. So that may counsel that these insurance policies may very well be reversible after a yr or two, if individuals get up. And concerning immigration specifically, that’s essential for the state’s financial system. For many years now, the principle reason behind the expansion within the labor power has been internet worldwide immigration, and that ought to proceed to be true going ahead. If immigration is shut down, the demographics will say that the inhabitants goes to fall, we’ll have fewer staff and a smaller financial system, and an financial system wherein the inhabitants is lowering and the labor power is lowering shouldn’t be a fairly image.
Q: So even when this week’s tariff insurance policies are fully reversed, Massachusetts would nonetheless see main financial impacts from federal immigration coverage shifts.
A: Proper. And likewise, the federal finances plan — it’s not clear but, however in accordance with the [Congressional Budget Office], if the administration goes to have the ability to push by means of the tax cuts it desires, that’s going to require spending cuts of a giant magnitude that may hit Medicaid, largely. And different [programs] — it appears to be like like DOGE has been successfully reducing the nation’s analysis and improvement funding. That’s not good for the nation, specifically, for this area, as a result of we get greater than our share of analysis and improvement funding from the federal authorities.
Q: To attach different indicators, how have MassBenchmarks statistics been trending?
A: On the finish of this month, we’re going to have the primary quarter GDP estimate for Massachusetts pro-state product progress within the first quarter. [Statistics are] not all in but. However we, for instance, have payroll employment for the primary two months of the quarter, and unemployment has been fairly stagnant in Massachusetts over the previous yr. Earnings progress has been fairly regular thus far, in order that’s good. The unemployment fee is edging up barely, however which may be as a result of rising labor power, which isn’t a foul indication. I’m fearful concerning the flat employment progress as a result of that’s going to imply slower output progress, slower earnings progress, slower spending, which impacts the nationwide financial system, but in addition state revenues as properly. However the main indicators, no less than the inventory costs and the arrogance measures, are usually not trying good proper now. So that may result in slowing progress within the second quarter. Hopefully it’ll nonetheless be constructive, however I’ll know later.
