From its beginnings as a farming and seafaring colony, Massachusetts became one of the most industrialized states in the country in the late 19th century and, more recently, a leader in the manufacture of high-technology products.
During the colonial and early national periods, the towns of Salem, Gloucester, Marblehead, and Boston, among others, gave the state strong fishing and shipbuilding industries. Boston was also an important commercial port and a leading center of foreign commerce. Agriculture was important, but productivity of the rocky soil was limited, and by the mid-1800s, farming could not sustain the expanding population. The opening of the Erie Canal, and subsequent competition with cheaper produce grown in the West, hastened agriculture's decline in the Bay State.
Massachusetts's rise as a center of manufacturing began in the early 1800s, when cottage industries developed in small farming communities. Large factories were then built in towns with water power. The country's first "company town," Lowell, was built in the early 1820s to accommodate the state's growing textile industry. Throughout the rest of the 19th century, the state supplied the nation with most of its shoes and woven goods.
Underbid by cheap labor in the south and in other countries, the shoe and textile industries died a slow and painful death. Manufacturing remained central to Massachusetts's economy, however. Fueled in part by a dramatic increase in the Pentagon's budget during the Reagan administration which focused on high-technology weaponry, as well as by significant advances in information technology, high-tech companies sprung up around the periphery of Boston in the 1970s and early 1980s. Wholesale and retail trade, transportation and public utilities also prospered. In the late 1980s, the boom ended. The minicomputer industry failed to innovate at the same pace as its competitors elsewhere at the same time that the market became increasingly crowded, and defense contractors suffered from cuts in military spending. Between 1988 and 1991, jobs in both high-tech and non–high tech manufacturing declined by 17%. The early 1980s also saw the rise of speculative real estate ventures which collapsed at the end of the decade when the market became saturated. Employment in construction dropped 44% between 1988 and 1991, and real estate jobs declined 23.8%. Wholesale and retail trade lost 100,000 jobs. Hurt by unsound loans, banks were forced to retrench. Unemployment rose to 9% in 1991.
The economy recovered in the 1990s, as evidenced by several banks' announcement of new lending programs as well as a reduction in the unemployment rate to 4% by 1997. Annual growth rates soared to 7.8% in 1998, 6.8% in 1999 and 9.8% in 2000 as Massachusetts benefited from information technology (IT) and stock market booms of the late 1990s. However, in the collapse of the dot.com bubble in the national recession of 2001, Massachusetts was the hardest hit among the New England economies, as growth abruptly plummeted to 1.7% in 2001. Continued weakness in national business investment and in equity markets continued to impede economic growth in Massachusetts in 2002.
Massachusetts's gross state product in 2001 was the 11th largest among the states at $287.8 billion, to which general services contributed $79.9 billion; financial services, $73.9 billion; trade, $42.2 billion; manufacturing, $34.4 billion; government, $26 billion, transportation and public utilities, $16.1 billion; and construction, $13.5 billion. Output from financial services increased 39% across the period 1997 to 2001, whereas output from general services increased 34%; from trade, 25%; and from both government services and the transportation and utilities sector, about 20%. Output from manufacturing increased 17% between 1997 and 2000, but then fell 9% in 2001. As a percent of total output, manufactures fell from 14.4% in 1997 to 12% in 2001. The public sector constituted 9% of gross state product in 2001, the 2nd-lowest percent among the states where the average was 12%.