The region's highly skilled and educated workforce and the presence of leading health care, higher education and technology organizations here position New England well for the future, Federal Reserve Bank of Boston President Susan Collins said Thursday. But slowing population growth and labor challenges exacerbated by changes in the ways people work will mean that New England needs to bolster the economies of rural areas and small cities if it is to continue to thrive.
Collins spoke Thursday morning at a conference convened to consider how pandemic effects like the emergence of hybrid work and changes in where people live will impact housing, commuting and the overall economy in New England. She highlighted the work the Boston Fed has been doing through its Working Places Challenge to encourage economic resurgence in parts of New England that "have struggled to reimagine and rebuild their economies" after the decline of industries like manufacturing.
"If we are to move toward a more inclusive economy over time, the capacity for low-income places to adapt to economic change, which Working Places supports, is ever more important. This is particularly true in the context of the kinds of changes in housing and work we are discussing at today's conference," Collins said.
Through the program, the Fed supports a competition among cities and towns for grant money provided by states, the private sector and philanthropists to address a "shared goal for improving the economy that benefits low-income people." Thirty communities across five New England states have participated since 2014.
In Lawrence, she said, the team "provided job training and wraparound services for more than 600 parents, assisted 200 families with job placements — with an average wage increase of 25% — created new training pipelines with employers and the local community college, and integrated some long-term interventions into the school system, aimed at improving family well-being."
Before the pandemic disrupted the school system, the Fed said, the Lawrence project that the Fed's Working Places Challenge was part of made progress in math scores in younger grades, saw increases in English proficiency, and notched increases in the graduation rate. Collins said the program often leads to "substantial" private and government investment.
"For example, in Fitchburg, Massachusetts, work by the local team was a key factor in now more than $100 million in new investment downtown and in surrounding neighborhoods," she said.
Jeffrey Thompson from the New England Public Policy Center at the Boston Fed gave a presentation on housing and labor markets, and explained how many smaller New England cities came to be former hubs of manufacturing.
"This is a story of 60 years of change in what our economies look like. Back in 1960, New England was substantially more reliant on manufacturing labor than the rest of the country. And, in fact, we have over 60 years now come into almost perfect alignment with the rest of the country in that manufacturing has shrunk. We don't manufacture nearly as much," Thompson said. "What we do instead is we now have a service-dominated economy. And what we have seen is that in the New England region, that services — professional and related services, so this contains the innovation economy, this contains the sectors that demand high skills and pay high wages — we in fact have surpassed the rest of the country adapting to this new reality, to this new economy."
He added, "So we have adjusted to dramatic transformations in the past. And are we up for the challenge? I think we are, but it's going to be quite a lot of work. There's a big curveball thrown at us in terms of how and where what will happen."
Thompson presented a data set showing that the share of full-time workdays conducted remotely has essentially plateaued around 30% in New England and another that showed occupancy rates for downtown office buildings hovering at 50% or below. While those facts are consistent with each other, he said, the two sets of data "let my imagination go to different places."
With the 30% remote work stats, he said, "I start to think, OK, is this a story of differentiation, an even further splits in the workforce? We have a bunch of fully remote workers who are gonna go off and live at the lake house in Vermont and phone into their home in Boston. We have big, big issues regarding equity in terms of some workers that need to show up and other workers who have the luxury of working from their laptop. If that's the future, that brings some challenges with it. I don't know that that's the future."
But considering the office space occupancy rates, "makes me think a little differently. Is the future instead actually just more flexibility in work. And so you still have the same basic geographic spatial footprint of today's economy, but with more flexibility. So your suburban worker, instead of coming in five days a week or four, instead they're coming in two to three. So that's a different picture of the future. It still has implications for transportation infrastructure, it has implications for real estate, for physical location, downtown business health — but it's a different story."
John Ballantine from Brandeis International Business School, who served as moderator Thursday, said the point of the conference was not necessarily to solve the region's problems or predict its future, but to start getting people to think creatively about solutions.
"We realize these are complex issues. We're just kind of trying to frame them and then we want to get a discussion and then naturally, the idea is that we come up with creative ideas and find out some policies that can help sort of address some of these issues," he said. "This is not going to be solved today. And it probably won't be solved tomorrow. But we've got to keep trying."
Addressing the current state of the national economy Thursday, Collins said she thinks the Fed will have to continue to raise interest rates to just above 5% and then hold them there for "some time" as it continues to try to wrestle inflation back down to its 2% target.
Collins, a member of the Fed's Federal Open Market Committee, said that she supports the central bank's shift from "the initial expeditious, aggressive pace of tightening to a slower pace" of rate hikes.
"The ongoing resilience in our economy — from many firms continuing to increase their payrolls, to business and household spending still holding up relatively well despite the uncertain economic environment — that resilience make me reasonably optimistic that there is a pathway to reducing inflation without a significant economic downturn," she said.
The slower inflation for goods seen during the last three months of 2022, Collins said, was largely a result of decreasing energy prices combined with lower demand because of the higher interest rates and easing supply bottlenecks bringing down input costs for businesses.
"But households consume far more services than goods, and services inflation remains persistently high," she said. "A key piece of this has been the sizeable increases … in shelter costs."