Some Landings Will Be Softer Than Others

The U.S. economy for the rest of 1995? In a word: slowdown. Businesses, especially in construction, retailing, and manufacturing, are already feeling the pinch from past hikes in interest rates by the Federal Reserve. Of course, the regional impact will vary. Here's a look at what's happening around the country.

NORTHEAST: High costs help cool the business climate

The Northeast is still feeling the chill from defense cuts and restructuring in manufacturing and financial services. Although business is improving, growth in output and employment still lags behind the national pace.

The New England states are generally faring a bit better that those in the mid-Atlantic. Output in New England is outpacing job growth because of productivity gains, especially in manufacturing. The mid-Atlantic, though, trails all other regions in both employment and output growth, and will continue to do so.

New England's strength lies in New Hampshire and Vermont, which will continue to lead the region. They feature lower business costs, more recreational opportunities, higher quality of life, and, as a result, faster population growth.

Because of its high-productivity information industries, Massachusetts will fare better than Connecticut, but both states suffer from high business costs. Wages, taxes, and costs for electricity and water make the states uncompetitive. Raytheon Co., Massachusetts' largest employer, may move some key operations unless it gets relief from power bills and taxes. Connecticut is still reeling from defense cuts and insurance-industry consolidation. Even more restructuring in financial services is likely as a result of bank mergers.

The mid-Atlantic faces similar problems. It has lost more than a million residents since 1991. In Pennsylvania, labor and energy costs are among the lowest in the Northeast, but business continues to be lost to the South in the key areas of steel and chemicals.

New York is beset by cuts in state and New York City budgets and by cutbacks on Wall Street. The likely repeal of the Glass-Steagall Act, separating banks, brokerages, and insurers, will help commercial banks but hurt investment banks and insurance companies. Given New Jersey's friendlier tax climate, New York City will continue to lose business across the Hudson River and to Connecticut's Fairfield County.

SOUTH: Casino and Olympic games keep it on a roll

Today Horace Greeley would say, "Go south, young people." Job growth in the region leads the U.S., and more than half of the area's strong population growth reflects migration from other states, mostly the Northeast.

The South has broadened its manufacturing base dramatically, notably in North Carolina, which now has the nation's highest concentration of factory jobs. The draw? Low-cost land and labor, a nonunion climate, business-friendly tax codes, and new highways and infrastructure. The South is also a growth area for tourism and retirement. Its blemish is education standards.

The problem: The U.S. slowdown will hit the South harder than elsewhere. Its cyclical industries are more vulnerable to the Fed's squeeze, and the region lacks industries that will do well in '95, such as industrial and high-tech equipment and export businesses.

Rest assured, though, the South will outperform the rest of the U.S. The leaders are Arkansas, Tennessee, and Mississippi, with Florida, Georgia, and North Carolina close behind. Georgia, with construction and service-related industries booming in preparation for the 1996 Olympics, will be a top performer.

Gambling is also fueling Southern growth. But with three Mississippi casinos now bankrupt, the industry there looks saturated. Harrah's new casino, under construction in New Orleans, will be the biggest in the world. The new southern auto industry will feel the slowdown, but it will still lend strength, especially the new BMW plant in South Carolina and the Mercedes-Benz project under way in Alabama.

Growth in Texas will also moderate, reflecting both a cooler U.S. economy and the Mexican recession. Retail sales in border towns are weakening, and exports to Mexico are down sharply.

MIDWEST: Manufacturing is slowing, but services sing

Thanks to unemployment rates well below the national average, midwestern consumers feel exceptionally confident about their economy. But that may well change when the U.S. soft landing slows manufacturing, which still employs 20% of the midwestern workforce.

Softer consumer spending on durable goods means those industries will be squeezed this year. Hardest-hit will be auto makers in Michigan and Ohio. Business spending on capital equipment and exports, though, will keep manufacturing afloat during 1995's slowdown.

The bulk of midwestern job growth will come in services. Finance, health-care, and business services companies have moved their back-office operations to the Dakotas, Nebraska, and Ohio, boosting payrolls there. Telemarketing has become a major employer in the Plains states. For 1995, job growth in the Midwest will run only a little below the national average.

These service jobs, though, are replacing higher-paying factory slots, especially in the eastern part of the region, so incomes will rise more slowly than in the rest of the country. Moreover, faced with slack demand, factories will cope by cutting overtime, another drag on incomes. That will hold down growth in retail sales and home building.

A concern for business in the Midwest is the lack of pricing power, with prices of manufactured goods up 2% in the past year. Profits have risen because costs have been pared. That trend will continue in 1995, although labor shortages will remain evident until late in the year.

WEST: Multimedia will offset downsized defense

The West will finally enjoy a stronger economy than other regions in 1995. In large part, that's because California will no longer drag down the region. Moreover, business activity in the West will pick up because the region's growing industries--tourism, high tech, and exports--are less sensitive to the shock of higher interest rates.

The weak dollar, for instance, means that the West will benefit from increased tourism by foreigners and Americans who cannot afford to travel abroad. The dollar will also help exporters of manufactured goods and raw materials. But unlike the East, the western states will ship more to Asia than to Europe. That means that shipping ports along the Pacific coast could be hurt by any slowdown caused by U.S.-Japanese trade posturing. What also clouds the trade outlook for the West is the precarious footing of the Japanese recovery as well as the fallout of the Mexican crisis.

Because of Silicon Valley, California is considered the center of computer-related industries. But Arizona, New Mexico, and Utah have successfully courted high-tech firms to build factories in their states. Lower costs and fewer regulations are key draws. The influx of industry and workers will power the construction boom in the Rocky Mountain states, although higher rates and building-materials prices and labor shortages will limit the gains in 1995.

Multimedia is considered the hot industry right now, and California remains an attractive site for these businesses. Regional economists expect multimedia enterprises to create 100,000 jobs in the next three years, offsetting the continued cuts in defense payrolls. Dreamworks SKG alone could create about 1,500 new jobs in Southern California.

compiled with bureau reports

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