Gain in leading indicators shows recession may be easing.

ECONOMIC INDEX LOOKS BRIGHTER 1.1%

March 29, 1991|By Ross Hetrick | Ross Hetrick,Evening Sun Staff

The government's chief economic forecasting gauge posted its biggest gain in almost three years, a sign local economists view with mixed reactions for Maryland.

Sales of new homes and residential housing starts were also up sharply.

The government said today the Index of Leading Economic Indicators, which has been flashing recession warnings for the past eight months, reversed course in February and posted a big 1.1 percent increase.

The Commerce Department said the gain in the index was the first since last June.

"This is good news," said Mark W. Meador, associate professor in the departments of economics and finance at Loyola College in Baltimore. "I'm pretty confident that the second quarter will show a positive GNP," he said.

He said it is possible that this economic downturn may be "relatively mild," lasting only the last quarter of 1990 and the first quarter of 1991.

The recent increase in housing starts was also another good sign. "Housing starts usually lead the recovery," he said.

Meador said he was also encouraged by the rise in consumer confidence and by the Federal Reserve's efforts to lower interest rates.

Sales of new homes recorded their biggest gain in almost five years last month, a 16.2 percent increase that analysts said provided further evidence that the housing industry's long slump is coming to an end.

Analysts said some of the strength was undoubtedly related to unusually mild February weather, which encouraged home buyers to look.

Economists said mortgage rates, which dropped as low as 9.25 percent for fixed-rate loans last month, also helped to lure buyers.

In other good news for the beleaguered housing industry, the government reported that construction of new homes and apartments jumped 16.4 percent in February while applications for building permits posted their first increase in eight months.

George Shehan, president of the Homebuilders Association of Maryland, said it would be six to eight months before the February figures are reflected in the number of building permits issued in this region. Nonetheless, he was optimistic.

"I think we'll see a very recognizable increase in activity by the end of the year," Shehan said. "We won't see a soaring increase like in the 1980s, but there should be pretty steady, very reasonable growth.

However, another economist warned against reading too much into a one-month change. "You don't look month-to-month, you look at the policies, things that drive the economy," said Barry P. Brownstein, an associate professor of economics at the University of Baltimore.

On those policy issues, which include taxes, government spending and trade policies, Brownstein is very pessimistic. "I don't have any indications of a serious shift," he said.

Bad signs for the economy include continued large government spending, high taxes and moves toward a more restrictive trade policy, Brownstein said. This is particularly true in Maryland, where legislators are considering a $90 million increase in taxes. "Increasing taxes will aggravate the situation," Brownstein said. "It's absolutely the wrong thing to do."

He said the current tax increase proposal in Maryland, which will primarily affect cigarettes, carry-out foods ands capital gains, will not hurt the state economy much. But Brownstein said the state could be severely hurt if taxes are substantially increased next year, as some legislators are discussing.

"Maryland happens to be an extremely high-tax state," he said. "Something has to give. We can't keep having a strong economy and continue to increase taxes," he said.

As to the effect of the current recession, Brownstein said Maryland's economy is "in the middle of the pack."

Elsewhere, analysts said the collection of forward-looking economic indicators was providing an unmistakable signal that better days are ahead for the U.S. economy.

Many economists said the February upturn in the leading index was not inconsistent with an end of the recession sometime in the April-June quarter. HTC The Bush administration is predicting that the country's first recession in eight years will come to an end during this period.

Three-fourths of February's gain came from just two sources -- the rise in stock market prices during the month and a gain in consumer sentiment.

While stock prices in March have given up some of their gains, surveys of consumer sentiment have soared even higher with the ending of the Persian Gulf war.

The Commerce Department on Wednesday said the nation's Gross National Product, or GNP, shrank at a 1.6 percent annual rate in the final quarter of 1990, well below the 2.0 percent most analysts had predicted.

Stock prices began rising sharply in mid-January, after the war with Iraq began, and continued gaining well into February. Department officials said the stock market advance accounted for more than half the overall February index rise.

Three indicators were negative, including higher jobless benefit claims, a shorter workweek and fewer contracts for plant and equipment.

Shehan, president of the Homebuilders Association of Maryland, said it would be six to eight months before the February figures are reflected in the number of building permits issued in this region. Nonetheless, he was optimistic.

"I think we'll see a very recognizable increase in activity by the end of the year," Shehan said. "We won't see a soaring increase like in the 1980s, but there should be pretty steady, very reasonable growth."

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