Recovery, Like Recession, Expected to Tap Sections of Nation at Uneven Pace

The Midwest revives as the Northeast squirms. The Southwest cruises toward better times while the Southeast strains to keep pace.

And throughout the United States, areas that barely shared in the prosperity of the 1980s are poised for a more profitable 1990s.

Economists remain unsure when the upturn officially will start, but they agree that--like the recession--it will be experienced quite differently among the nation’s regions and industries. These differences were highlighted Wednesday in a new Federal Reserve survey that paints a picture of widely varying conditions throughout the nation.

“It’s been a very uneven recession, and it’s going to be a very uneven recovery,” declared David Wyss, an economist with DRI-McGraw Hill in Lexington, Mass.

The Fed’s Beige Book analysis of the U.S. economy pointed to a modest improvement in conditions overall. Yet it also documented differences among various parts of the country.

It cited retail gains in Chicago, for example, but stagnation in Atlanta and a decline in Richmond, Va. The manufacturing outlook was better in Cleveland than New York or San Francisco. Banking remained generally lackluster, with some Midwest areas citing modest strength in consumer loans.

The coming recovery will feature its own cast of winners and losers and, in the process, reveal much about the nation’s economic landscape of the 1990s, analysts agree.

Forecasts by Area

Here’s how different parts of the country are expected to fare in the coming expansion:

* The Midwest, which has weathered the slump more successfully than past episodes, is expected to come back in tandem with the nation overall. The region has been strengthened by a 1980s shakeout that left its manufacturing sector more efficient than ever. One looming question, however: Will economic weakness overseas cut into the region’s exports?

* The Southeast is also expected to revive along with the nation as a whole--and perhaps perform above the average. The area’s many producers of lumber, textiles and related products are counting on an upturn in housing. “I think it’s very clearly beginning,” said John M. Godfrey, senior vice president at Barnett Banks of Jacksonville, Fla., of the local upswing.

* New England and the Middle Atlantic states may have to wait until late in the year for relief. Hard times came early to New York and other cities, which are still digging out from problems in real estate and financial services. Connecticut, Virginia and Maryland may suffer more from defense cutbacks than anywhere else, including California, said David Shulman, managing director at the Salomon Brothers investment firm in New York.

* Much of the West appears sound, having escaped the brunt of the recession with a boost from low business costs and growing populations. Parts of Washington, Arizona, Nevada, Utah, Colorado and Idaho remain leaders in creating new jobs.

* California--especially coastal areas in the south--continues to undergo an adjustment that echoes that of the Northeast, but the process is expected to be less severe. The recession wheeled into California after it hit the Northeast, but the Golden State’s recovery could begin sooner. Population growth and a diverse assortment of industries remain economic pluses.

“Southern California will probably trail the national expansion a bit,” Wyss said. “But I don’t think it will trail as much as the Northeast will. I think we’ll be seeing a more uneven recovery nationally than at any time in the past.”

Part of the reason is that frailties that aggravated the recession have yet to be cured fully. Regional achievers of the 1980s, notably the Northeast and California, face uncertainty in a world of lingering trouble for real estate, construction, defense and financial service industries.

Poised for Growth

By contrast, large sections of the nation’s interior--oriented more to manufacturing and agriculture--are poised for growth. In a reversal of fortune, areas that missed out on the real estate frenzy of a few years ago look like today’s winners, less burdened by excess building, construction layoffs and related economic debris than other regions.

Manufacturing exports, meanwhile, make up a much larger share of the economy than they did several years ago. That’s a fundamental shift that favors regions that once seemed in jeopardy.

“The Midwest didn’t have that kind of boom (real estate), and therefore we didn’t have a bust,” explains Theodore H. Tung, senior vice president at National City Corp. in Cleveland, where homes appreciated at a 4% to 5% annual rate in the past decade.

Overall, economists expect the recovery to be unusually modest, which means there will be fewer gains to share than in heady upturns of the past. On Wednesday, chief White House economist Michael Boskin repeated his forecast of growth in the 3% range for the rest of this year, about half the pace of prior recoveries.

That means prospects for many of the unemployed, as well as part-timers in search of more work, may improve only gradually. To the disappointment of retailers, consumer spending may make just a tepid comeback, as a more family-oriented baby generation searches for practical bargains instead of conspicuous luxuries.

Indeed, the relative shallowness of the 1990-91 downturn makes it unlikely that the economy will roar ahead in the coming months. “After the last recession, the 1980s were a period of substantially higher expectations than we have now,” said Allen Sinai, chief economist at the Boston Co.

As the expansion develops, it will be affected by fundamental changes in the U.S. economy that alter regional prospects from the last recovery in the early 1980s.

Consider the U.S. dollar. The currency strengthened dramatically after the last slump, putting American producers at a severe pricing disadvantage with their overseas rivals. Added to that, many factories--often in the Midwest and North--were aging and inefficient. Not surprisingly, they got hammered by foreign competitors.

Better Technology

But much of U.S. manufacturing has restructured and upgraded its technology since then. Exports have risen sharply, and the dollar--despite a rally earlier this year--remains well below its mid-1980s’ peak. As a result, the outlook for the Midwest is far more favorable than last time.

“I think the recovery in many respects will be a mirror image of the early 1980s,” said Stephen S. Roach, a senior economist with the Morgan Stanley investment firm in New York.

Distress between the coasts wasn’t confined to the Midwest in the last expansion. After smokestack America was clobbered by foreign competition, Texas, Oklahoma and other energy-oriented states suffered a crash in energy prices. But today, energy prices seem more stable, and the surviving firms are a more efficient bunch.

This time, real estate is the commodity that has lost value--not just fancy homes but office buildings, hotels and other commercial developments in California, the Northeast and other places that prospered in the last decade.

Such areas, typically saddled with a surplus of commercial real estate and financial and business services, may be in for a choppy recovery. An array of business services that expanded rapidly in the go-go days of takeover mania--from law to accounting to consulting--also face hurdles in the more austere, post-recession era soon to unfold.

And on top of that, the outlook for retail and wholesale trade in many regions is questionable, given doubts about consumer spending, said Mickey D. Levy, chief economist at CRT Government Securities in New York.

“You’ve seen much more layoffs in the service industries than you’d expect (during the recession), and I think that’s going to continue,” he cautioned.

Still, there are some favorable signs for California. The Fed’s Beige Book survey, conducted before June 10, noted a 12% rise in existing home sales in April, as well as some new commercial construction in Southern California.

The competitive business environment of the 1990s may be yet another force creating new winners and losers as firms feel pressure to expand and invest in low-cost regions. States in the South and interior West, some of which are ardently courting Southern California firms, could be the beneficiaries.

“Given the competitive environment that the U.S. faces in the world, firms are being forced to operate in low-cost places,” said Shulman of Salomon Brothers. “We think the bi-coastal boom of the 1980s is over.”

The Economy: A Regional Look 1. Retail sales are improved, but gains partly reflect weather and pent-up demand. Manufacturing sales and orders are mixed. Employment and capital spending lag 1990 levels.

2. Retail sales are mixed. Existing home sales have increased, while office leasing has remained sluggish. Office vacancy rates in Manhattan are at their highest levels in 20 years.

3. Economic activity is steady, with improvement in manufacturing. A third of area plants plan to increase hiring, and half will step up capital spending. Loan demand is still weak.

4. Some employment gains have been made, and retail sales have improved. Commercial and industrial loans remain flat although small-business loans have picked up in recent weeks.

5. Manufacturing activity is flat, and retail sales are lower. Little new commercial construction starts were recorded, and housing activity is lackluster. Agricultural prospects are favorable.

6. Home sales remain on an upward trend. Retail sales have gained slightly as most merchants are keeping inventories lean. Heavy rains could hurt agriculture.

7. Home sales have recovered, but commercial construction remains soft. Labor strikes have hurt some projects. Consumer spending is up. Makers of consumer durable goods report better results.

8. Retail sales have improved, and home building has rebounded. Many service businesses continue to hire. Manufacturers are expanding their operations, but commercial building is depressed.

9. The job market has improved slightly. Retail sales have exhibited moderate growth, while new-car sales remain weak. Cattle prices are up, but farmers face mixed prospects because of recent heavy rains.

10. Housing starts and farm incomes continue to be strong. Retail sales are steady, but consumer confidence remains shaky in some areas. Demand for consumer and home loans has increased.

11. Home building has picked up in major markets. Growth in the service sector has increased modestly. Manufacturing orders improved.

12. Retail inventories remain tight, and new-car sales are slow. Media advertising volume has declined. Manufacturing activity is slow, and construction activity is improving.

Source: Federal Reserve