No fun in'91

By Alan M. Gayle Senior Vice President & Chief Economist Crestar Bank

UU ITH a background of a slowing UU economy, dipping consumer confidence and tax hikes, it is not surprising that the building industry has ground to a halt, although the impact clearly varies by region. Consumers have all but stopped buying houses in general, but those builders who have not committed heavilv to speculative building should not be hit as hard. Those builders with inventory (homes and land) will have more problems, particularly on the financing end.

On the commercial side, the surge in building activity during the '80s is not likely to be repeated in the '90s, and it may be some time before the current glut of office space is absorbed. In the Washington, D.C., metro market, we estimate that conditions for office building may become favorable as early as the beginning of 1992, but the depth and duration ofthe projected recession is a critical variable. While we do expect the D.C. office building market to recover, the '90s will likely see only half of the level of buildin! reached in the last decade. Strong fundamentals will allow the absorption ofexcess space and will generate the need for new building.

The bright news in this otherwise gloomy scenario is that the outlook for inflation and interest rates is very good. A resolution to the Persian Gulf crisis, slower wage growth and easier monetary policy should help lower inflation and interest rates. During a normal recession, shortterm rates such as the prime fall roughly 400/o-500/o from the peak. This would imply a drop in the prime luxuries. Today, quality and value are virtues that are demanded by any customer. In addition to our buyers, our thousands of manufacturers and suppliers clearly understand the importance of offering the best products available at very competitive prices. We foresee that this trend will only get stronger in the future.

Story at a Glane

A higher service level will be a must ior retailers.. better fained personnel essential for contractor customers. Florida willcontinuetogrow.

Scotty's is looking forward to the rest of the '90s. We expect challenge, we anticipate change, we're striving for innovation and we're going to take advantage ofevery opportunity to be successful.

rate to approximately 60/o sometime in 1991. While interest rates are likely to fall in the months ahead, the availability of and the competition for foreign capital is likely to put a floor under the prime around 8o/o8.5% by the middle of the year.

Story at a Glance Building to remain deprcse ed... inflation and intercst rate outlook good .. cyclical uf swing fior builders due in 1992.

In short. the outlook for the new year is not rosy, and the building industry will have more than its share of difficulties. However, the recession will help lower interest rates and improve the financing fundamentafs by 1992. At that time, the industry should be able to regain more solid footing for a new cyclical upswing in building.