A flood of good news about the U.S. economy has brought bad news to the Maryland economy, in the form of long-term bond and interest rates that economists say could seriously threaten the state's still-shaky recovery.
The run-up in interest rates hurts Maryland particularly hard because the shrinking defense industry robs the state of most benefits from the manufacturing recovery that is powering the national economy, making the interest-sensitive housing business its best hope of new jobs, economists say.
The U.S. average 30-year fixed mortgage rate broke through the 9 percent level Tuesday for the first time since March 1992 -- reaching 9.02 percent -- and eased only marginally to 8.99 percent yesterday, according to figures compiled daily by HSH Associates, a New Jersey-based consultancy and information firm.
"We are starting now to see the effect of continued economic strength on mortgage rates. The direction is still up, and we expect that the 9 percent range is where we will spend the rest of this year," said Paul Havemann, an HSH analyst.
Unlike, for example, the Rocky Mountain states, which are booming and might benefit from the dampening effect of higher interest rates, Maryland stands to see an already snail-like recovery slowed further as rates surge, economists said.
"Maryland's share in the recovery has been consumer-driven, relying much more heavily than other states on home sales and the follow-up big-ticket items people buy once they move in, and higher interest rates are cutting into home sales," said Michael A. Conte, director of regional economic studies at the University of Baltimore.
"Take a look at the furniture business -- in the recession, Maryland lost 5,000 jobs in furniture stores alone -- and we're not getting them back. If mortgage rates begin to close in on 10 percent, we're going to have to seriously evaluate whether Maryland is going to continue to have a recovery at all," Mr. Conte said.
In the Baltimore metropolitan area, 30-year fixed mortgage rates, which usually are slightly below the national average, stood at 8.95 percent Tuesday, the latest day for which HSH had regional averages by last night. That is 2.19 points higher than the 6.76 percent low they hit less than 13 months ago, on Sept. 10, 1993.
The latest sign of a buoyant U.S. economy came yesterday when the Commerce Department reported that orders to U.S. factories soared by 4.4 percent in August, the biggest gain in nearly two years and a full percentage point higher than economists had forecast.
The report pumped still more fuel into financial markets' fears of inflation and drove the yield on the benchmark long bond, the 30 1/4 -year Treasury, bond up .06456 percentage point, to close at 7.945 percent.
The stock market, already afraid that strong economic news may force the Federal Reserve into this year's sixth interest-rate increase even before its November meeting, lost more ground yesterday. The Dow Jones industrial average shed 13.79 points to close at 3,787.34.
Additional economic figures are due this week and next, and many economists and investors are worried that employment figures due tomorrow may be the final straw that pushes the Fed to act again.
"We still think that on balance the odds are they'll wait until November, but if the payroll figures are very strong Friday, that surely will increase the pressure to do something," said Daniel Friel, vice president and senior economic analyst at NationsBank.
For savers, rising interest rates are finally beginning to have the long-awaited silver lining of higher yields from certificates of deposit and other savings accounts.
In the week that ended Tuesday, the average six-month, small-denomination CD rose to 4.02 percent from 3.89 percent the week before, and the average on five-year savings CDs rose to 5.96 percent from 5.88 percent.
Bank advertisements, which for more than a year had stressed loan rates in a drive to draw in borrowers, have begun in recent weeks to stress CD and other savings rates.
That reversal means that banks, which for more than a year had been having trouble finding borrowers, have seen rapid growth in lending and now are becoming more aggressive in seeking new funds to lend, economists said.
"What we are seeing in the savings market is the effects of some very dramatic growth in consumer lending since August of 1993 and less dramatic but very substantial growth in commercial and industrial lending since March of 1994 as businesses have borrowed money to invest and meet the increasing demand," Mr. Friel said.
But for Maryland's economy, which ranked 46th among the 50 states with anemic job growth of 0.68 percent for the 12 months ended in August, rising interest rates have no visible silver lining.
"I expect that when we see figures we'll find that mortgage rates have already had their impact on real estate sales in Maryland in the last 30 to 60 days. Every time rates pop up another quarter of a point, that takes some people out of the market and means some others have to adjust downward on how much house they can buy," said Theodore E. Reichhart Jr., executive vice president of Maryland National Mortgage Corp.
Economists who follow Maryland have had to reduce their expectations several times this year, mainly due to rising interest rates.
"I think I was the least optimistic of anyone about the Maryland economy, and interest rates have risen faster than anyone forecast and become a drag, so that even I have had to cut back," said Charles McMillion, president of MBG Information Services, a Washington-based consultancy that tracks the state.
Interest rates are hitting a point that could hurt Maryland in ways that go beyond the impact on housing sales, economists say.
"A lot of companies here are struggling, and up to now they have been hanging on in Maryland, hoping for better times to help pull them out," said Paul Lande, an economist at the Johns Hopkins Institute for Public Policy Studies.
"In some cases, interest rates are going to add just that margin to their costs that forces them to look for lower-cost locations farther south in the Carolinas," Mr. Lande said.