Look for the stgnals

By Philip Kuharski Executive Vice President Fidelity Mutual Savings Bank Spokane, Washington

AS THE long term secular trend of inflation in the United States been reversed?

If it has, then all of us who have an interest in the construction, lumber and building material business should be quite optimistic. On the other hand, if that secular trend has not been reversed, there is good reason to be seriously concerned about the very survival of many firms associated with the construction industry. The current, monetary-policy induced recession is intended to be the final nail in the cof-

Story at a Glance

Consumer inflation will be down... residential mortgage financing should average 141/zo/o 15oh - 20o/o im' provement in housing starts ... Some Western areas will do well, but not the Pacific Northwest. fin of excessive inflation. We really won't know if a significant change has happened for a few years, however, there are certain "keys" that can give us an early reading, even during 1982.

Before expanding business aggressively, I would suggest lhat Merchant Magazine readers look for signals that indicate that fundamental improvement in the construction market is at hand.

If union wage settlements in 1982 average 7o/o or less, that would be a positive factor. If excise taxes are increased on such items as liquor, tobacco and gasoline, that too would be a good sign. If the national savings rate equals or exceeds SVzslo of disposable personal income during 1982, then real progress has been made. If the Federal Reserve follows a steady policy and allows the monetary aggregates to increase within their target ranges, that would be constructive.

On the other hand, if wage rates increase faster and savings are more sluggish, it would be very difficult for the capital marketplace to be oPtimistic about lower inflation and interest rates.

Despite frequent bouts of Murphy's Law, our bank is optimistic that the patience and moderation suggested last year will pay off as we work our way through 1982. Consumer inflation should average 8 to SVzo/o next year compared to over l09o this year. Interest rates should drop accordingly by at least lVzs/o on average. That means that residential mortgage financing will range from l3 to 1690 with a l4Vzslo average for the year. This is not a big drop but enough to bring some life back to real estate construction.

We expect a 15 to 2090 improvement in national housing starts. Most of the gains will happen in those areas with unemployment rates below 890. The Northwest will not be one of those areas, but some other areas in the West should do well.

In summary, the trough in housing starts for the next 3 years is most likely occurring right now. The improvement in starts and total construction activity will be gradual, but should pick up momentum within another year. In the meantime, we shouldn't lose sight of the fact that quite a bit of construction is financed from internal cash and individual wealth. The new tax act will encourage commercial real estate construction even while we continue to wait for improved momentum in the residential sector. But to be honest, the major advice for 1982 and beyond is: Look for the signals of fundamental improvement in the nation's economic health . then you can start planning to make sound profits.