Upturn in spring

By Lynn Reaser Vice President & Senior Economist First Interstate Bancorp

Fl ESSIMISM over the U.S. econ- F omy has mounted during the closing months of 1990. Housing starts nationally will be at the lowest level since 1982. Employment de- clines have spread through man u factu ring and construction and recently extended to retailing, wholesaling, and service industries. Unemployment has been climbing, while consumer confidence has plummeted.

How severe will any downturn be? We believe that the economic slump will be short and shallow. The economy is unlikely to fall into a protracted or cumulative decline for at least three reasons. First, resolution of the Middle East situation without major damage to oil facilities would cause business and consumer confidence to improve substantially. Oil prices would recede to an average of about $20 a barrel in l99l and long-term interest rates would drop sharply. Second, the Federal Reserve will not stand idly by while the economy starts to slide. It will allow short-term interest rates to decline and pump more money into the economy. The bank prime rate could be down to about 9o/o by the middle of next year.

Consequently, we believe that economic conditions will be starting to improve next spring. Interest rates on 30-year fixed-rate mortgages should be below 100/o through all or most of 1991. Our forecast is for a modest upturn in housing starts to 1.29 million units next year. Home improvement activity should also

Economic slump will be shott & shallow. 1.29 million housing starts in '91 ...lumber & home center sales and profit improve ment due.

pick up as consumers become somewhat more confident about their own jobs and the economy in general. The overall economic recovery, however, is likely to be relatively mild.

Regional disparities will continue to be pronounced. The western states appear to be in a comparatively good position. California's real estate market has cooled markedly after two years of boom, and home prices are likely to be essentially flat in 1991. The state's overall economy has slowed substantially along with the rest of the nation. California's real estate market, however, is not collapsing. In addition, lower-priced areas such as Sacramento and the San Joaquin Valley are expanding rapidly, while lower-priced homes in the more expensive areas are also continuing to sell.

The Pacific Northwest will see further moderation, but growth will continue and the region will likely outperform most parts of the country in 1991. The Rocky Mountain states are continuing a process of gradual recovery. Nevada's explosive gains are ebbing. Arizona's basic economy is improving, although the overhang of commercial real estate persists. On balance, population and job growth in the western part of the United States can be expected to be somewhat better than the country at large.

Both lenders and builders will remain cautious going into next year, but 1990 is likely to mark the low point of the housing cycle.