How a UMass Economist Makes Sense of Crosswinds Facing Startups

Anyone paying attention to financial markets in recent weeks knows that questions about the country's economic trajectory are at record highs. New tariffs sparked widespread stock selloffs and rebounds, while economic data remains mixed, with job creation strong, inflation rates choppy, and consumer (as well as business) confidence softening.

In an effort to find out what this means for startups and the local economy, Startup Boston caught up with Dr. Mark Melnik, Director of Economic and Public Policy Research at the University of Massachusetts Donahue Institute, a consulting public policy think tank that studies the economy, workforce, and related issues. In this wide-ranging interview, Dr. Melnik discusses his views on the impact of government policies in the United States and Massachusetts and how that will shape startup funding and hiring trends in 2025 and beyond.

[Note: Startup Boston conducted this interview before President Trump paused retaliatory tariffs on most nations.]

SB: With all the uncertainty in the economy – and what we saw with "Liberation Day" tariffs – how are you thinking about 2025 for the U.S.?

MM: Social scientists are great at describing what happened – not always at predicting what will happen. And this is one of the hardest moments in recent memory to pin down where the economy is going.

Markets hate uncertainty. And right now, the new administration is behaving in ways that are hard to pin down from a policy standpoint. Liberation Day was maybe the most direct signal yet of what's actually happening. But even then, it's still murky.

The policy directives just aren't clear. There are broad conceptual things – tightening border security, tariffs – but not much clarity on the degree or implementation. And in my world, working in a university in Massachusetts that relies on federal funding, there are big concerns about agencies like NIH and NSF.

The unemployment rate is still low by historic standards, but this is the most unsettled I've felt about the economy since Covid. Back then, the shock was huge, but the recovery was relatively quick  – apart from inflation. Right now, everything feels unmoored.

SB: How much weight do you give soft data like consumer sentiment, which has shown a significant drop?

MM: That's definitely a factor. I always say there's a psychological side to the economy. The media captured this well last year by calling it a "vibecession."

There was this disconnect between what the hard data said and how people felt – especially in the run-up to the 2024 election. Inflation was a big driver of that. And the lack of confidence in the economy was clearly a factor in Trump's win.

So yes, those vibes matter. If people feel tight about spending – and we're already seeing some of that – it becomes a self-fulfilling prophecy. So, even though it's soft data, it can be a leading indicator. The vibes shape actual behavior and outcomes in the economy.

SB: Zooming in on Massachusetts, do you think it's better or worse positioned for what's coming?

MM: Better or worse than what is key. Historically, Massachusetts has done better than the nation as a whole through recessions and recoveries. During the Great Recession, we weren't hit as hard, and our rebound was stronger.

That's largely because of our mix of industries. We're strong in eds and meds and in the agglomeration economies that stem from that – like life sciences and tech. And you also have all the spinouts and growth that radiate from those sectors.

But now? I think we'll fare worse relative to our own historical performance. Some of the Trump administration's rhetoric and policies are hitting directly at those sectors – eds and meds. These were once seen as recession-proof, but Covid and the Great Recession showed us there's no such thing. They're resilient, not invincible.

What made them resilient was reliable federal funding. If that becomes more volatile, the entire ecosystem feels it.

We also rely heavily on high-skilled immigrants. Since 1990, nearly 80% of our labor force growth has come from foreign-born workers. A large share of those immigrants have graduate degrees. We're third per capita in H-1B visas. Many come here for school and stay.

But if immigration tightens or the rhetoric creates a chilling effect on international students, we're in trouble. That positions Massachusetts in a very precarious place.

SB: And what does all this mean for startup fundraising?

MM: Well, just like markets hate uncertainty, so do VCs. Sure, they take risks, they place bets – but when the macro environment feels shaky, they may be less inclined to act. Or they may hoard cash.

Interest rates are also a big unknown. We had good reason to believe rates would fall as inflation cooled through 2023 and 2024. But if tariffs drive inflation back up, those rate cuts may not happen. And higher rates can depress investment appetite.

If costs start spiraling, investors will definitely get more cautious.

And if the federal government becomes less supportive of innovation – think clean tech, offshore wind, areas Massachusetts has invested in heavily – that affects the broader ecosystem too.

SB: You touched on immigration and the workforce earlier. Any broader labor market trends founders should be watching?

MM: Yes. One big issue is the aging workforce. For the last 20 years, labor economists have warned about the "silver tsunami" – Boomers and older Gen Xers reaching retirement age.

Covid froze everything for a couple years, and that conversation went quiet. But we didn't stop aging. And we saw a wave of early retirements, elevated death rates, and a steep drop in immigration.

That's left us with a smaller and older labor force. Immigration was supposed to help fill that gap. But with a new administration that's lukewarm on immigration at best, and hostile at worst, we're going to feel the pinch.

Even if they say they're "for legal immigration," in practice, we need more workers just to maintain the economy we have.

So, looking ahead 10–20 years, I think we'll see tight labor markets and real hiring challenges. For founders, that's crucial. You might have the idea, the passion, the early traction – but when it's time to scale, will you have the workforce to do it?

That's not just a startup problem. It's economy-wide. But it can absolutely put a lid on growth for new ventures.

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About the author: Randall Woods is a former editor at Bloomberg News and currently is a Senior Vice President at SBS Comms, a communications agency for technology companies and startups.