Recession possible

By Lynn Reaser Vice President and Senior Economist First Interstate Bancorp

HE ECONOMY is likely to slow substantially in I 1989, with a better than even chance of a mild recession. The housing industry will be dampened by higher mortgage rates in the first half of 1989 but should begin to recover by the latter part of next year.

IA recession in the U.S. economy is not inevitable but will depend on two conditions: (l) inflation rising to a level of 5olo or above and (2) the Federal Reserve responding with measures to slow the economy significantly. We believe any recession would be mild, beginning in the second quarter of 1989 and lasting only two to three quarters.

Actions by the Federal Reserve to control and reduce inflation before it moves much higher will prevent the severe kind ofdownturn experienced in the early 1980s. The national unemployment rate is likely to move slightly above 60lo by the end of next year, compared with a peak of about llolo in 1982.

Interest rates are likely to peak in the first halfof 1989 and then drop quickly as the economy slows. The bank prime rate could reach a peak of about l1% in the first half of 1989 and then fall to around 90/o by year-end. Rates on fixed-rate, 30-year mortgages could move slightly over I l0lo in the first half of next year and then ease towards 100/o by the end of 1989.

tremendous swings we have had in the past. There must be a concerted effort on quality and grade to keep this momentum going. Because it is unique as a species and has adaptability, cedar has the flexibility to be a strong export product.

U.S. western red cedar, which constitutes 30 to 400/o of all western red cedar, threatens to be in short supply due to the shortage of second growth logs which yield a top quality, tight knot product. Available raw logs for manufacturing into lumber are under a great deal of pressure. Exports of raw logs are creating an unnecessary shortage in basic log needs for U.S. mills.

Story at a Glance

Strong remodeling market will aid cedar ... export market growth... marketplace consistent. western red cedar may be in short supply. price rises likely.

All cedar products including siding products will be forced upward in price, but this should be a controlled rise from current levels. The change should be apparent immediately and continue in a sustained manner through 1989.

The cedar fencing market is strong and at present it appears it will continue strong throughout the first and second quarters.

Sawmills are taking control of their destiny by having a greater variety of value added products and more sophisticated marketing habits.

The housing industry no longer bears the primary brunt of swings in economic policies. Financial market deregulation means that lenders can still attract funds, although at a higher price. Development of the secondary mortgage market and such instruments as variable-rate mortgages are also important buffers for the homebuilding industry.

Nevertheless, the housing industry will experience about a 40/o drop in new starts in 1989 to a total of 1.41 million units. This will follow a drop of nearly l0% in the current year. The good news is that housing will also lead the next recovery with an estimated 100/o jump in new starts in 1990.

Story at a Glance

Economy likely to slow chance of a mild recession interest rates will peak in the first half, then drop . . . housing starts: 1.41 million.

On balance, the homebuilding industry is likely to experience a more difficult year in 1989 in response to a lower level of new construction. Certain factors will help to offset that weakness. First, although permits for new oflice and other nonresidential buildings will decline next year, projects started in 1988 will need to be completed and furnished. Second, the home repair and remodeling market should record moderate growth as homeowners may decide to renovate their present homes rather than move.

Builders Emporium, Ort'ltard Supply Hardware and O/e's may be sold off as Blackstone Group and llt'esserstein Perella & Co., which have made a tender offer for Wickes Cos., plan to sell most or all of its retail operation . .

Ernst Home Center. Moscow. Id., has remodeled, adding a furniture dept. .. Hylton Lumber ol Alamosa is the new name for Home Lumber, Alamosa, Co., Picie Hylton, owner and Jimmy Lopez. mgr....

Hayward Lwnber C'o., Claremont, Ca., is being liquidated with the Lucerne Valley and Barstow units being acquired by Imperial Valley Lumber Co., Claremont, which is operating under protection of Chapter I I bankruptcy... Dave Kirk and Lee Morton are negotiating to purchase Mead Clark Lumber Co.. Santa Rosa, Ca., from owner Dusty l)estruel

HomeClub, Int'. is building a 103,909 sq. ft. warehouse store with a 9,880 sq. ft. nursery, due to open March '89, in Boise, Id. . Alomosa Lumber Co.. Alamosa, Co., has remodeled, adding 1500 sq. ft. ofsales space, to celebrate its 59th anniversary...

Woodburn Lumber Cb., Woodburn, Or., is celebrating its 60th anniversary ... Long Beach Plywood, Long Beach, Ca., is 40 yearsold...

Ready Made Builders Suppl-v. Salt Lake City, Ut.. has formed a new div., Ready Made Lumber Jackson .Street Lumber Co.. Hayward, Ca., htrs been voluntarily closed after 48 years due to the retirement of [:'rank Diamantine, owner ... Luntbermeil's Building Centers unil in Kent, Wa.. has closed. .

Rancho Home Improvemenl Center has closed its Glendora, Ca., operation and opened a new Palm Springs, Ca., unit in addition to relocating corporate offices to Rancho Cucamonga Ca. . . . Crcstwootl Forest Prodtrt'ts, Bethel Island. Ca.. was never partially ownecl by Ron Dybas, as was incorrectly stated in the Octoberissue...

Ed Holderness .\upplies is opening a new facility in Chandler, Az., hoping to be operational next month Cal State Forest Produtts has moved down the street to larger quarters at 1949 S. State College Blvd., Anaheim, Ca....

Marrluart- Wol/b Lumhrr Cir.'s Corona, Ca., plywood div. has moved to a larger sales office and distribution center in Grand Terrace, Ca. . RLD Trading, [nc. has opened an office at 240 Main St., Oakley, Ca.. Ron Dybas, owner

Eureka, Ca., lumberman George Schmidbauer has started production athis Cal-Tex Lumber C'o. sawmill in Nacogdoches, Tx.. manufacturirrg 8'-24' southern yellow pine dimension and commons lumber, Finn Hurley. sales mgr. . .

Willamette Industries will close its Sweet Home, Or., sawmill permanently on Feb. 3 and place the second shift of its Midway Veneer, Sweet Home, on lay-off . . . Timber Product Soles Co.. Springfietd, Or.. is now handling sales for Medply, lnc., White City. Or....

Hamptttn A/.litiatcs plans to acquire Fort llill Lumber Co.'s plant and equipment at Valley Junction, Or., by March 1, marketing to be handled by Humpton Lumbtr .Salcs Co. . .

Lou isia na- PaciJit' Corp.'s stud mill in Saratoga, Wy., destroyed by fire last May, is rebuilt and back in production with sales being handled from the Hayden Lake, Id., office . .

Western Machinery .Sa/es has moved from lrvine. Ca.. t"o 1247 N. Lakeview No. B" Anaheim. Ca. 92807 .. . Sumwood, Inr'.. Palos Verdes Peninsula, Ca.. is representing Createc Forestry ,lystems (tallying devices) in the westernstates...

Negotiations between Louisiana-Paci.fic Corp. and Doman I ndustries, Limited have collapsed (see p.39 for story)...

Louisia na- PaciJic Panel Products, Lrd, plans to build a fiber gypsum plant on Cape Breton Island. Nova Scotia. Canada . .

Manville Corp., Denver. Co., plans to sellits Holaphane lighting unit based in Newark. Oh.. ..

U.S. exporls in Aug. of so.liv,ood lumber (latest figs.) hit the all time one month record of more than 300 million board f'eet

Maximum inlerest rate fat federally backed VA home loan mortgages has been lowered to l0%r by the I/eterans .4dministration . .. mortgages rates have hit a seven month low with fixed rates available at under l}u/o .

Oct.'s seasonally adjusted rate of I .55 million housing starts was up 1 .2{th .. single family home starts climbed l}ott; multifamily, 0.20/o, building permits, 7.40h. . . biggest part of the increase was in the west, especially California