Generally rosy outlook seen for state, nation; Maryland might be poised to out perform country this year, analysts say; The Year Ahead

THE BALTIMORE SUN

Maryland's economic fortune is tied to the country's this year, analysts say. That's good for two reasons.

First, it suggests that Maryland's economic hobbles have finally been broken, that it has left its last recession in the dust. The state did much worse than the United States as a whole from 1990 through 1996, as the malaise of defense cutbacks, federal downsizing and manufacturing failures lingered like a cloud.

Second, the United States is expected to have a pretty good year. Maryland could do a lot worse than hitch its caboose to an economy, strongest in the world, that keeps surpassing forecasts and defying history.

"'98 was just a spectacular year for the state, for the country, on every score," said Charles McMillion, chief economist for MBG Information Services, a Washington forecasting and consulting business. "Wages were up. Productivity was pretty good. Balanced budget."

If anything, McMillion said, "I think Maryland has gotten to the point where it will begin to outperform the country as a whole."

Mortgage rates are at their lowest since the 1960s. Maryland booked its best job growth and lowest unemployment in a decade last year. Maryland personal income is finally rising at an acceptable rate. Like the country and many other states, Maryland boasts a budget surplus. Inflation is almost invisible.

Not all analysts agree that Maryland will outperform the nation this year, and they identified plenty of risks. But none expected Maryland to diverge sharply from the national trail, and all predicted the national economy would continue expanding this year, although at a slower pace than last year.

Few foresee a U.S. recession

"Maryland will grow with the national economy," said Mahlon Straszheim, chairman of the economics department at the University of Maryland, College Park. "Although employment growth has been less, Maryland's personal income is high. Its unemployment rate is very low. And the state will probably continue to grow a little bit less than the nation in terms of employment growth."

Several analysts expect Maryland will have added more than 50,000 jobs in 1998 when the final figures arrive. It was the best year for the state since the 1980s, and economists were impressed not just by the number of jobs but by their quality. "You really haven't had the rapid growth in retail trade, tourism, a lot of the lower-paying jobs," said economist Mark Vitner, who follows the state for First Union Corp. of Charlotte, N.C. "We know that income growth has been pretty good in Maryland. The quality of jobs being added in Maryland stacks up with any other part of the country."

More than 700 of those jobs belong to Amerix Corp., a Columbia company that demonstrates the rewards and the risks of Maryland's new prosperity.

Growing from nothing in two years, Amerix pays new workers more than $25,000 annually, plus benefits, to help overextended consumers pay back debts. More than just a credit counseling service, Amerix intervenes directly with creditors all over the country and makes its money from banks and other lenders that are thrilled to recover funds they thought were permanently lost. "This may not sound humble, but we have really revolutionized this industry and how it works," said Bernie Dancel, Amerix's founder and owner. "There are billions of dollars every year that are getting charged off, and it doesn't have to be that way."

Consumer debt undergirds much of the U.S. economy and is one of several caution lights flashing on the forecasting console. Many economists believe that consumers will pull back and that debt delinquencies will rise further, which might be good for Amerix but would be bad for the overall economy.

At the same time, Amerix symbolizes another challenge for Maryland: its ability to attract and retain good employees in an age of the mobile corporation.

Companies continue to demand large subsidies from Maryland taxpayers and [See Overview, 3k] threaten to move their operations if they don't get them. Hotel operator Marriott International and shipping concern Maersk/Sea-Land are two of several companies seeking large, taxpayer-funded incentives.

Amerix, too, is considering its alternatives. "We are in the beginning stages of developing a corporate campus," Dancel said. "We are looking at Maryland, Delaware and Northern Virginia for that corporate campus."

'I like it here'

While Dancel promises to examine several options, "when it comes down to it, we are Maryland's to lose, basically," he said. "These other states can't just be better than Maryland by a little bit. They have to be better by a significant amount because I like it here. My kids go to school here."

Nonbanking financial service companies such as Amerix are an important part of Maryland's employment surge. Traditional banks are still steadying themselves after being acquired by out-of-town concerns. But companies such as mutual-fund house T. Rowe Price Associates Inc., stock brokerage Legg Mason Inc. and credit-card issuer MBNA Corp. are helping push the economy forward.

Business-service companies have also bloomed, driven by massive capital investments in computers and related equipment, outsourcing by the federal government and fixing Year 2000 computer bugs. Internet businesses and other communications companies are healthy, too.

"The thing that I think has been most remarkable for Maryland is this continuing strength in the communications sector," said Champe McCulloch, head of the Maryland Chamber of Commerce and a former Bell Atlantic executive. "Maryland appears to have a very good base in the broadly defined communications industry for now and in the future. If you're going to pick an industry to be in, that's a great one."

Employment by the federal government itself seems to have stabilized. Not long ago, cost-cutting Republicans in Congress threatened tens of thousands of Maryland jobs.

"I think we have seen the worst" in the federal sector, Straszheim said. "The federal budget balance is better. A lot of the cuts have been in the defense area."

Four years of consolidation and downsizing in the defense industry are also deemed almost over, and some analysts expect an increase in federal defense expenditures in the future. That's good for Maryland's numerous defense manufacturers, led by Lockheed Martin Corp. and Northrop Grumman Corp.

Maryland's long-budding biotechnology industry finally appears to be bearing fruit, as products mature and appear on the market. Other areas of health care, however, especially in-patient hospitals, face challenges.

Manufacturing challenge

The most challenged industry this year, by many accounts, will be manufacturing. The strong U.S. dollar has made foreign goods alluringly cheap for American consumers and American products disconcertingly dear for overseas buyers.

"The biggest concerns are around manufacturing," said Margaret Murphy, an economist with the Baltimore office of the Federal Reserve. "But some of the losses in manufacturing are being made up by increases in the service sector, in the government sector."

Maryland's saving grace, if it can be called that, is that it doesn't have much of a factory base to lose, thanks to decades of erosion. Proportionally, the state has one of the smallest manufacturing work forces in the country.

With Maryland's fundamental economic engines firing, the secondary gears and belts are turning over, too. Retail sales continue to be healthy, with home furnishings and luxury goods especially strong. Maryland home sellers had a banner year in 1998 and look forward to more activity this year.

"I wasn't really driven" to buy a house, said Jay Corey, 34, who recently moved into an old mill home in Oella in Baltimore County with his girlfriend, Kellie Score. "We just kind of casually started looking" and ended up buying because mortgage rates were low and the time seemed right, Corey said.

"I figured, if I'm going to do it, I might as well do it now," he said.

Housing trends reflect a profound change in Maryland's economy that goes beyond the good news of the last year or two.

A decade ago, two-thirds of Marylanders owned their homes. Now nearly three-fourths of Maryland homes are owner-occupied, and Maryland is near the top in national homeownership growth in recent years.

Analysts aren't sure what explains the change, but they said it speaks well of the state's economy, and they note that homeownership is rising to some degree all over the country.

"Part of it is the population is getting older, and the older you are, the more likely you are to own a home," said Robert Callis, a housing statistician with the U.S. Census Bureau. "You have low inflation. Interest rates are probably as low as they've been in the past 30 years. In general, it seems that lenders are a little more flexible in making loans. It seems like there's a lot of money out there."

"A lot of money out there" explains many industries in 1999, not just home mortgages. The stock market, store sales, tourism and business investment have all been well lubricated, and their future depends to no small degree on continued monetary fluidity.

If Maryland's commercial fate is tied to the nation's, the nation's depends largely on Alan Greenspan and the Federal Reserve.

For 18 months, the United States has weathered economic storms pummeling other parts of the world, most notably Asia. While the problems have hurt U.S. manufacturers and distended the country's trade deficit, the underlying economy has continued to grow. As an insurance policy, the Federal Reserve has reduced short-term interest rates three times in recent months, raising the U.S. money supply and stimulating the economy. Many analysts believe the Fed will continue the stimulus this year, but they also think international echoes will get louder in the United States.

"We expect a slowdown nationally," said Ann Battle, an economist with Crestar Bank in Richmond, Va., echoing many of her colleagues.

The U.S. economy grew by more than 3.5 percent last year, measured by gross domestic product, many analysts estimate. Predictions for GDP in 1999 range from just 1 percent to more than 3 percent, but the consistent theme is one of deceleration.

In addition to brittle foreign economies, prognosticators point to the American consumer as a risk factor.

"Last year it was the consumer in Maryland and the consumer nationally that drove very strong growth," said McMillion. "This spending is really unsustainable. Consumer spending and consumer borrowing have really gotten out of hand."

Even so, nobody is expecting a steep drop in the nation's or Maryland's economies. Maryland will have added jobs at a rate of between 2.2 percent and 2.5 percent for 1998, about the same as the country as a whole. Some forecasters, including those at Towson University's Regional Economic Studies Institute, think Maryland job growth could slow to as little as 1.4 percent this year, hindered by a more sluggish national economy.

Others think Maryland will best the nation, helped in part by its small reliance on manufacturing. Patrick Arnold, director of labor market analysis for the state Department of Labor, Licensing and Regulation, predicts another year of 2 percent job growth or better.

And even 1.4 percent job growth would be respectable for Maryland this year, given its low unemployment rate and lackluster long-term performance.

"I think we're going to finish [1998] either at or a tad below the U.S. average, and [this year] we're going to be at or a tad above," said the Fed's Murphy. "I don't see anything big to worry about."

Pub Date: 01/24/99

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