After a very solid year, what does 1998 hold for Maryland? Views: Three economists offer their opinions on how 1998 will shape up financially.

January 18, 1998|By JAY HANCOCK

What will 1998 bring for Maryland and the nation? Jay Hancock, The Sun's economics writer, interviewed three specialists. They are J. Patrick Bradley, senior vice president and director of economic and investment research, Mercantile-Safe Deposit & Trust Co.; Charles McMillion, chief economist of MBG Information Services, a Washington economics and forecasting consultancy; and Margaret M. Murphy, vice president and economist with the Baltimore branch of the Federal Reserve Bank of Richmond.

Q: How did the national economy do last year? And how much of that momentum is going to carry into 1998?

Bradley: I think for 1997 we're going to come in darn close to 4 percent in real growth, something like 3.8 percent, which is a pretty good performance. I think we're going to have pretty good momentum to carry us into 1998. We'll slow down a little, but I'm thinking about 2.6 percent. That's going to come from continued strong consumer spending and good investment spending.

McMillion: We'll have about 3.5 percent growth for the country in 1997, which is really quite a good year, but I see growth in 1998 coming in at less than 2 percent. And there are enormous downside risks.

Murphy: This is an amazingly strong performance right now. We're looking at gross domestic product coming in just under 4 percent for 1997, which is incredible for this late stage in an economic expansion. Usually you tend to have robust performance early on. The consensus forecasts coming into 1997 didn't seem to be anywhere near 4 percent.

For 1998, I wouldn't be surprised if growth is closer to 3 percent. I don't see the negatives that are cranked into these 2 to 2.5 percent forecasts.

Q: Charles, you apparently see the negatives. What are the downside risks?

McMillion: The thing that troubles me the most are consumer debt levels in Maryland and the U.S. They are at or near an all-time high, at the same time that per-capita savings are at an all-time low. So if there is a significant shock, consumers are not really in great shape to absorb it, whether it is the loss of a job or loss in wages.

Q: What form might the shock take?

McMillion: The concern du jour is the Asian situation. The thing that is paramount in everybody's mind is the impact it will have on our stock market. In my view this incredible bull stock market of the last five years has been important for all kinds of reasons. Certainly it has generated a lot of wealth. But it has also served as a key symbol for consumer confidence.

Q: Why would economic problems in Asia hurt U.S. stocks?

McMillion: If Japanese banks and other Asian banks, or for that matter, U.S. investors with exposure in Asia, have to take money out of the U.S. stock market or bond market to cover bad debt, it could obviously drive prices down. That's the overriding fear in -- the stock market these days.

Q: Pat, what's your read on the Asian problems?

Bradley: Unless the Asian crisis gets materially worse, I'm not thinking it's going to be a major drag on the economy. Maybe it's about half a percentage point off the gross domestic product. The drag is going to be on the trade side. We're not going to have negative export growth, but what export growth we have won't be nearly big enough to keep the trade deficit from widening.

Q: You're not as worried about consumer debt and consumer spending as McMillion. How come?

Bradley: You hate to say debt doesn't matter, because it does. But what's far more important to consumers' psyche is: Am I employed? Do I have to be worried about my job? Am I continuing to bring home a decent income? And if consumers can answer positively to all those questions, I think they'll continue to spend regardless of the levels of high debt.

Q: Peggy, you're the most optimistic of all. Why do you think we'll get closer to 3 percent than 2 percent growth this year?

Murphy: A lot of what's driving the 2 to 2.5 percent forecasts is the turmoil in Asia and an assumption of slackening demand here. But domestic demand doesn't look like it's going to slow down. Employment is strengthening from already stratospheric levels. Personal income is doing very, very well. Consumer debt is not particularly abnormal and therefore not likely to limit household spending. Q: What's the outlook for interest rates? Thirty-year mortgage rates are under 7 percent, and the 30-year Treasury bond went under 6 percent. Should I refinance my mortgage now?

Bradley: I may be in a minority, but I think rates go back up from here. I don't see how they can keep moving lower in an economy that's going to continue to grow. And with continued growth there's going to be continued growth in imports, and what that means is that the U.S. economy is borrowing from foreigners to maintain its consumption. At some point, rates are going to rise. We're looking for a rate increase of half a percent up the maturity spectrum over the next four quarters.

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