Optimism on the Economic Front

March 31, 1991

Consumer confidence is neither easily understood nor well-behaved, but it may be the winch that hoists this economy from the depths of recession. That's the news from the latest Federal Reserve surveys of the local and national economic pulse. That reading was further bolstered this week: On Friday the government said its index of leading indicators climbed by 1.1 percent in February, it's first gain in since last June and the strongest jump in more than 2 1/2 years. This followed news on Wednesday that 4th quarter GNP numbers were better than previously thought.

Sluggish income growth and unemployment remain big concerns, but a growing contingent of government and private economists see hints of a rebound. A chief reason for this seems to be the end of the gulf war and its effect on consumer and business confidence. Last summer's Iraqi invasion of Kuwait simultaneously drove up oil prices while driving down consumer and business spending. The end of the conflict has not only returned oil prices back to prewar levels, but seems to be contributing to a decided uptick in confidence.

A survey of Maryland manufacturers conducted by the Federal Reserve Bank of Richmond suggests that the state's manufacturing vital signs have stabilized. The same trend is apparent in retail sales, real estate, tourism and the financial markets, though activity in these areas remains weak. Businesses, nonetheless, reported being "decidedly more optimistic about the economic outlook."

At this point, evidence supporting a return of consumer confidence is more anecdotal than statistical -- an uptick in traffic in model homes and car showrooms, for example. This is particularly pronounced in Maryland, which has been hard hit by real-estate-related troubles. Despite continued sluggishness in general business barometers -- shipments, new orders and sales backlogs -- Fed economists see a trough in the overbuilding that has characterized this recession. Though the browsing in homes hasn't yet translated into sales, economists expect lower mortgage rates and increased consumer confidence to begin making a dent in the supply of new and existing houses.

The picture is considerably less rosy on the commercial side where a decade of constructing malls, strip centers and office buildings that no one needed has left a glut of non-productive assets that will take years to work through. But even here, market discipline in the form of watchful regulators and cautious bank lending officers is preventing builders from digging themselves in deeper.

Against the current backdrop of layoffs, plant closing and

strained local governments, the Fed's latest economic evaluation hardly cause for joy. Nevertheless, it represents a glimmer of hope that consumer confidence, which plunged as the economy went into recession, may be inching upward again. It can't happen too soon.

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