Md. economists foresee a year of slower growth and higher interest rates MARYLAND'S ECONOMY 1995


January 01, 1995|By JOHN E. WOODRUFF

For a look at 1995 prospects for the nation and the state, three Maryland economists participated in The Sun's annual round-table discussion. Participants were Michael A. Conte, director of regional economic studies at the University of Baltimore; Ann O'Brien Franklin, chief economist for the state Board of Revenue Estimates; and Douglas Kinney, chief economist for Baltimore Gas and Electric Co. They were interviewed by economics writer John E. Woodruff.

Q: Will the U.S. economy continue to grow through 1995?

Douglas Kinney: Yes, I believe it will. By all preliminary reports, consumers spent quite liberally for this Christmas, although that raises concerns as to whether there will be some retrenchment after the holidays.

Michael A. Conte: Autos will probably be impacted, and housing starts have already seen a hit. That's the beginning of the traditional part of the slowing, and I think we will see that carrying into next year. So there will be a slowdown, but not a recession.

Ann O'Brien Franklin: I agree. But growth will be supported by stronger growth in exports and continued strong growth in capital investment.

Q: Can Maryland hope to catch up with national growth rates in 1995?

Mr. Conte: I really don't think so. We have a problem in terms of engines of growth that needs to be resolved before we can expect to grow with the balance of the nation.

Ms. Franklin: I think employment growth in Maryland will be about 1 percent in '95, which will be the best performance we have had since the late '80s. There are definite sectors that will show stronger growth and may even approach national growth, but overall I think that we will still lag.

Mr. Kinney: It is true that the Maryland economy hasn't claimed its full share of the national recovery. If you look at real personal income for the second quarter of 1994 with, say, the first quarter of 1990, for the U.S., it is up 6 or 7 percent over that 4-year period. For Maryland it is up about 3.7 percent, and the Baltimore area appears to be lagging both the U.S. and Maryland.

Q: The Federal Reserve has raised interest rates six times since February 1994. Will interest rates go still higher in 1995?

Ms. Franklin: Yes. We are looking for the federal funds rate to go up about another half-point.

Mr. Kinney: We don't expect long-term rates to go higher in 1995. The Federal Reserve may see fit to raise short-term rates another notch. But we believe that that increase in the short-term rates perhaps will be favorably viewed by the bond markets as forestalling inflation. On the long term end we don't see much room for increase in 1995.

Mr. Conte: In terms of long-term rates, it depends upon whether we have a significant deficit associated with the new "Contract with America," which involves increased defense spending and decreased taxes. I think that we may very well see as much as a point on long-term rates as a result of the potential lack of fiscal discipline.

Q: How will interest rates affect the national economy?

Mr. Kinney: We are going to see a dampening effect begin to take place. Housing construction has dropped off slightly, and I would expect that as adjustable mortgages get adjusted upwards in the coming years, that's going to take purchasing power out of consumers' hands.

Mr. Conte: As we increase interest rates, money tends to flow to the U.S. from abroad. That places upward pressure on the price of our currency, which interestingly enough has a reinforcing effect on inflation.

Ms. Franklin: There seems to be some reduced responsiveness to higher interest rates this time

around, because adjustable rate mortgages are taking an ever-increasing share of the total. I think that the slowing in '95 will be modest in the housing sector and the consumer sector, and I think the corporate sector is largely shrugging off higher rates.

Q: How will interest rates affect the Maryland economy in 1995?

Mr. Conte: A fairly high percentage of Maryland's growth over the last year has been in areas that are highly interest-rate sensitive, consumer durables and real estate follow-on-type purchases. Therefore the dampening affect will be more severe.

Ms. Franklin: I think that there is still a fair amount of pent-up demand among Maryland consumers, because the recession was so severe and because the employment prospect has just '' started to brighten. That will keep consumer spending pretty solid through early '95. While housing construction will slow because of interest rates, the commercial construction sector is on potentially a whole different cycle. Also, the multifamily housing market is being supported by tax benefits, so that might also be somewhat stronger.

Mr. Kinney: We do not expect housing activity to continue at the rate it has for the last 12 months.

Q: Which sectors do you see driving Maryland's growth in 1995?

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