Recession possible in slowing Md. economy UM study points to real estate, defense cuts

October 02, 1990|By Liz Atwood | Liz Atwood,Evening Sun Staff

Maryland's economy, which out-performed most of the country in the 1980s, has slowed considerably in the last 18 months and is in danger of following the rest of the nation into a recession early next year, according to a leading economist at the University of Maryland.

Mahlon R. Straszheim, chairman of the Department of Economics at the university, said yesterday that a study shows Maryland no longer is outpacing the country in terms of employment growth and personal income. Rather, the state's economy closely mirrors that of the nation and is feeling the effects of a depressed real estate market and cutbacks in the defense industry.

"It's a little sobering for people in Maryland who have been used to a growth rate above the national average," the economist said. But he said his projection is not so bad that it means "Maryland will be in dire straits in the 1990s."

However, Straszheim said the slowing economy will affect the state's budget, perhaps more than previously thought. Already the governor and his staff are trying to find ways to cope with a projected shortfall in tax revenues. State officials last week said they expected Maryland may take in $150 million less than expected during the fiscal year that ends next June 30.

James B. Rowland, an assistant to state Budget Secretary Charles L. Benton Jr., said that under the worse-case scenario, the deficit could be as high as $270 million. Although the budget originally anticipated an 8 percent increase in tax revenues, the figures have been revised to expect a 6 to 7 percent increase, he said.

But Straszheim said the budget shortfall could be greater than state officials are predicting. The economist said tax revenues in the state probably will increase less than five percent. As a result, the shortfall could be about $300 million, he predicted.

Straszheim is one of the authors of the 63-page study, released yesterday, on the status of Maryland's economy. The study is based on a computer model comparing the state's employment and personal income growth with that of the country.

For the next two years, the future of Maryland's economy will be either one of recession or slow growth, Straszheim said.

Under the slow-growth scenario, personal income would increase by 6.5 percent in 1990 and 5.6 percent in 1991. Real income in the state would increase by only 0.5 percent in 1991.

If the real estate market and banking industries decline even more, the state could slip into a recession early next year, the economist said. Under the recession scenario, the state would experience a negative growth rate for all of 1991, but the economy would start to grow slowly again in 1992.

In any case, both the recession and the subsequent recovery would be less dramatic than in previous recessions, he said.

Straszheim said the crisis in the Middle East is adding to the uncertainty that consumers feel and making them more cautious about spending.

The Middle East crisis also is having a detrimental effect on the state and national economies by pushing up oil prices. The higher oil prices, combined with higher labor costs, are nudging inflation up even though economic growth is slowing, he said.

According to the study, the slowdown in the state economy began about 18 months ago.

For example, while employment in the construction industry grew at an outstanding 11.8 percent a year between 1983 and 1988, construction employment actually declined 0.9 percent a year from 1988 to the summer of 1990.

In the services sector, employment growth slowed from an annual rate of 7.5 percent to 2.6 percent in the past 18 months. Similarly, employment in wholesale and retail trade sipped from a 5 percent growth rate to 0.6 percent.

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