Brendan Courtney, Baltimore-area director for Interim Financial Solutions, was home recovering from back surgery last week when a local banking client e-mailed him to say it was moving ahead with a major project planned for August, and wanted to know if the local temporary-help and employment-placement firm would help with any staffing needs.

For the client, the cacophony of inflation fears, a slowdown in housing starts and worries the Federal Reserve might force interest rates skyward is like the din of a distant thunderstorm you believe won't strike your town.

The decision to proceed is noteworthy because banks are more quickly affected than most businesses by changes in interest rates -- faring well when rates are low and struggling when rates rise.

"Here's an organization that's moving forward, despite what economic indicators seem to be saying" about higher rates and a slowdown in the economy, said Courtney.

The bank's confidence would seem to disregard a string of disclosures during the past two weeks that have been among the gloomiest to surface during the U.S. economy's record ninth year of uninterrupted growth.

In the past two weeks, a government report said consumer prices rose last month at the fastest rate since October 1990 and nearly double what was expected; analysts said car sales have topped out; housing starts plunged last month; and the Fed announced that it stands ready to tighten credit to keep inflation from taking hold.

Economists and analysts generally agree that the torrid U.S. economy has peaked, but that's where the agreement ends. Their projections hit both ends of the spectrum: from subdued-but-healthy growth to a deep recession hallmarked by an odious stock-market correction.

Most economists believe the U.S. economy -- and Maryland with it -- will be fine for at least a year and likely for longer. They consider the recent inflation figures an aberration, and say it's far from a sure bet the Fed will boost rates. They believe U.S. growth will slow to a sustainable pace, meaning consumers don't have to fear a big drop in their living standard.

"We don't have a recession on the radar screen at all," said Mark Vitner, vice president and economist with First Union Corp. in Charlotte, N.C.

But, as is the case in economics, that viewpoint is not unanimous -- hence the adage that "economics is common sense made difficult."

Deep recession

Deutsche Bank Securities is forecasting a deep recession that will begin in this year's fourth quarter and last about a year. The impetus: not higher interest rates, not inflation, but rather the Y2K software bug.

U.S. firms have pretty much exterminated the millennium bug, though small outbreaks will no doubt appear. But overseas suppliers to these U.S. firms haven't been as aggressive and their shortcomings will cause interruptions in the flow of information and needed foreign-made components, said Deborah E. Johnson, senior economist for Deutsche Bank.

The upshot: Output -- the measure of an economy's health -- will decline by 2.5 percent to 3 percent, constituting a recession. The Dow Jones industrial average could fall as much as 40 percent, to 6,500, as corporate profits are crimped because money is diverted to fix the worldwide software problem, according to Deutsche Bank Securities. Intermittent power outages and product shortages will add to the discomfort, though the forecast also calls for the Dow to rebound to 15,000 by 2005.

Even so, the downturn will be "pretty significant," said Johnson.

Few economists are such gloom-and-doomers.

Consumer report questioned

Most question the validity of a May 13 government report that said prices for consumer goods and services rose at their fastest rate in nine years. A spike in oil prices that is now subsiding was blamed for much of the jump, even for items such as apparel in which energy prices were not supposed to be a factor.

Indeed, a report last week said U.S. oil reserves had grown, which should be a harbinger for lower prices at the gasoline pump.

Since inflation is bad for bonds -- it erodes their value -- bond prices fell, pushing yields on the benchmark 30-year Treasury bond dangerously close to the 6 percent level most experts say would cause stocks to plunge. Bond yields are a leading indicator of the direction of overall interest rates, which rise in virtual lock step with upticks in inflation. Those yields have backed off, indicating confidence that inflation isn't as bad as first thought.

One local investment expert says interest rates will fall. "Yields [on bonds] will approach 6 percent before they approach 5 percent, but by year-end they will be closer to 5 than to 6," said Dick O'Brien, senior vice president for the Hunt Valley office of brokerage house Folger Nolan Fleming Douglas Inc.

Overseas economies

Among oracles of economic Armageddon, darker scenarios exist. If ailing overseas economies -- on the comeback trail -- really heat up, that growth would spark such a demand for money that global interest rates would jump. High rates could short-circuit the global recovery and this newest contagion could infect the U.S. market.

Or foreign firms, with their home markets in shambles and thirsting for sales, could flood the United States with ultra-cheap, foreign-made goods, stealing market share from U.S. companies, squashing their profits and causing their shares -- and the U.S. economy as a whole -- to stumble.

The Fed's pronouncement last week that it had adopted a "bias" toward tightening credit wasn't a surprise, but put the stock-and-bond markets on alert, since such a move would push up interest rates -- making it more expensive for consumers to borrow money for houses, cars and other items. Consumer spending is the big driver of the U.S. economy, accounting for two-thirds of the nation's economy.

During this nine-year expansion, consumers have continually shown their willingness to spend -- even now, with consumer debt levels and personal bankruptcies at levels that should be alarming. Worse still, the nation's savings rate is essentially zero -- or worse -- meaning consumers are spending as fast, or faster, than their wages are coming in.

That's partly because of the "wealth effect": when consumers see their fat 401(k), mutual fund and brokerage statements and feel confident enough to buy that boat, house, car or big-screen television -- even if the sticker price is a bit beyond their means.

Higher interest rates would hammer a stock market in which the shares of most companies are priced well above what their profits warrant -- particularly with Internet companies that aren't expected to turn a profit for years. A stock-market free fall would likely dampen spending.

As First Union's Vitner noted, a Fed "bias" toward tightening credit by boosting the rate it charges for overnight loans may be more threat than promise. Of the past three times it's adopted this stance, it's raised rates, left them unchanged and cut them.

Last year, when it last announced a bias toward ratcheting up rates, the central bank cut rates three times in short order to stave off a worldwide economic meltdown, says Bob Sweet, chief economist with Baltimore's Allied Investment Advisors.

It would probably take another month or two of consumer-price numbers that show inflation is returning for the Fed to tighten credit, most say.

'Seeds of a slowdown'

Economists are expecting growth to continue in the low-to-high 2 percent range, with inflation remaining largely in check.

"The seeds of a slowdown were sown in 1999, but that slowdown will not manifest itself until 2000," said Anirban Basu, director of applied economics at Towson University's RESI economic-research institute. "The outlook for 1999 remains bright."

Maryland seems strong. The housing arena remains a seller's market, and good properties are snapped up quickly, said Bob Connelly, vice president of Lutherville-based FNMC -- formerly First National Mortgage Corp.

Lending rates are about a point above their decade low of 6.375 percent, reached in September 1993. That's $66.81 per month more in payments on a $100,000 mortgage, he noted, and consumers are showing a desire to buy "move up" houses, Connelly said.

'Strong growth' in Baltimore

Maryland was hit harder than much of the country by the early 1990s recession and took longer to recover. But last year, the rate of average annual job growth in the state edged out the rate in Virginia -- Maryland's economic rival and benchmark state -- for the first time this decade, RESI's Basu said. Maryland's growth rate of 2.5 percent fell short of the 2.6 percent U.S. average, but was an improvement over 1991, when U.S. employment fell 1.1 percent and Maryland's plunged 3.3 percent, according to Bureau of Labor Statistics figures.

Basu and First Union's Vitner believe Maryland has since bulked up. Its defense business has stabilized, and it is home of the biotechnology and computer-and-telecommunication technology companies central to the "new" industrial revolution. These entrepreneurial companies employ highly educated and skilled people, offer the highest-paying jobs and are the greatest wealth-creators for founders, employees and shareholders.

Said First Union's Vitner: "I see continued strong growth in the Greater Baltimore area, including the suburbs of [Washington], D.C."

Pub Date: 5/23/99