High hopes for region's three-cornered economy

By , Staff writer of The Christian Science Monitor

The Bank of Boston pays James M. Howell to play the role of oracle. Of course , as chief economist he pores over reams of economic data and does some serious calculating before proffering his prognostications.

What's his fiscal forecast for the region?

''In the next three to five years New England will experience unparalleled prosperity,'' Mr. Howell predicts. And among economists, he's not alone. Says Allan Sinai, chief economist at the Lehman Brothers, Kuhn, Loeb brokerage house in New York, ''I'm hard put to find a group of states with greater potential.''

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New England's unemployment is lower than any other region in the nation. New Hampshire's jobless rate tops the list at 4.3 percent for December. The national average is 8 percent.

Wages here, now among the lowest in the nation, are expected to rise fastest. High employment, especially as national joblessness drops, means competition for skilled workers and professionals is going to heat up.

In this recovery, New England has a jump on the rest of the United States because it suffered least in 1981-82. While the rest of the nation was staggered by the worst recession in decades, the pace of growth here merely slowed. The region's gilt-edged prosperity is due as much to what it lacks as to what it has.

The last recession hit the auto, steel, and housing sectors hardest; soaring interest rates crushed traditional smokestack industries. During the past 20 years, New England has moved out of smokestacks and stocked up on high-tech firms. As a result, the area remained partly insulated from these ravages. And it reaped the benefits of continued growth, albeit slower, in computer-related industries during the recession.

But high technology is not the only leg New England's economy stands on. There are two additional trestles that provide a ''balance that New England hasn't had in many decades,'' says Howell at Bank of Boston.

''Sophisticated services (medical, educational, and financial)'' Howell says, are a stout and strengthening limb. Nationwide, the service industry is the fastest growth area - New England is no exception. Two of every three workers here are employed in this sector.

''From 1975 to 1981 the number of individuals employed in the medical, business, and education sectors jumped by one-third, while finance, insurance, and real estate together added over 65,000 jobs during the same period,'' writes Dianne M. Caughey, economist of the New England Council in Monitor, a quarterly newsletter begun last fall by the New England Economic Project.

The third leg of the economic triad here? Defense industries.

New England benefits more than any other region of the nation from President Reagan's boost in defense outlays. The area is flush with major defense contractors such as General Dynamics, United Technologies' Pratt & Whitney, Bath Iron Works, General Electric, Raytheon, and Sanders Associates.

''Over the next four years, New England ought to get $82 billion in defense funding. That in turn will generate demand for some 225,000 workers; about half of that number will be new jobs,'' says Howell. He bases his estimates on Reagan's $1.6 trillion defense budget proposal spanning fiscal years 1983 through '88.

Massachusetts and Connecticut each get, and probably will continue to get, more than their share of the US military hardware contracts. Connecticut won more prime defense contracts (over $10,000) per capita than any other state in 1982. Massachusetts placed third.

''In 1984, almost all capital spending increases in New England will be due to defense funding,'' Howell says. Each year the Bank of Boston surveys 4,000 manufacturers to determine their capital-spending plans. The survey will be released later this month.

The region experienced a similar buildup in the late '60s, and the economy became overbalanced in defense-related manufacturing. In Massachusetts, between 10 and 12 percent of total employment was in defense work. This time, says Howell, defense-related jobs may reach a more comfortable 5 or 6 percent of the total.

Many companies capturing defense contracts here are high-technology based. This is the most essential component of the region's economy. It overlaps and supports the growth in services and defense and is responsible for leading the recovery here.

''The first area for expansion in this recovery has come in computer-related equipment. We have benefited from that greatly,'' says Allen Groves, vice-president and director of research at the Federal Home Loan Bank of Boston.

This year, the industry expects ''explosive growth: up 20 to 25 percent,'' says Charles Baker, spokesman for the Massachusetts High Technology Council. Beyond 1985, the burgeoning federal deficit may sap the credit markets of crucial investment funds, and Mr. Baker is less assured about growth.

Lynn Browne, an economist at the Federal Reserve Bank of Boston, is, well, even more reserved about high-tech prospects down the road. ''We have been and are enjoying a period of upsurge in high-tech. But we're not necessarily going to see quite as strong an upsurge in the future. I expect to see the rapid expansion in computer technology slowing down.''

The three legs of New England's economic stool are strongest in Massachusetts , Connecticut, New Hampshire, Vermont, Rhode Island, and Maine, respectively. To the degree that each state incorporates these three components, it has surmounted the hardships of this last recession and moved quickly into recovery.

Rhode Island and Maine are the laggards. Rhode Island suffers from ''a disproportionate mix of 'sunset industries' headed sideways or downward,'' says Gary L. Ciminaro, chief economist of the Fleet Financial Group, in Providence, R.I. Jewelry and silverware, textiles, and apparel combine to make up a large segment of the state's manufacturing jobs. These industries - extrasensitive to the national economic cycle - have been hit hard and are slowly recovering. Yet, a 6.8 percent unemployment rate in December is below the national average.

Maine is building its high-tech base, but is still heavily grounded in the shoe industry, which is bumping up against stiff foreign competition. The lumber and paper industries are stronger now, but the work force has not increased dramatically.

In both states, defense work has remained steady and further boosts are predicted. Maine gains from the contracts Bath Iron Works wins, and a host of subcontractors in Rhode Island are filling workers' pay envelopes with Trident submarine money.

While Maine and Rhode Island are economically weakest, the other New England states are not without limping industries. The last couple of years have been tough for many workers in western Massachusetts, central Connecticut, and the Springfield, Vt., area. ''Metal-working, machine-tool, and abrasives companies are traditionally highly cyclical. And machine tools especially are suffering from new inroads from foreign competition. They're not industries in decline, just highly volatile even when growing,'' says economist Browne. And these segments tend to be last in the capital-investment cycle. This year will be strong for many machine-tool makers, but, due to the foreign inroads, it is doubtful that they will reach former production levels.

The region's agricultural woes are focused on dairy producers struggling in Maine, New Hampshire, and Vermont. In recent years, many of the smaller dairy farmers have given up or been bought out by large producers. Federal milk price supports are under attack in Congress, and state officials are concerned about the industry's outlook.

Aside from these trouble spots, the region is inherently healthy. And there are pleasing short-term gains:

* With last autumn's throngs of foliage-gawkers and this winter's influx of ski-happy visitors, New Hampshire and Vermont are having their best tourist season ever. ''Tourism can mean the difference between a good year and a great year,'' says Jeffery Carr, an economist at Vermont's state planning office.

* Low unemployment figures are pulling in workers from other areas. Vermont reports that a miniboom in housing started last year, and New Hampshire is experiencing a strong building surge. The Vermont furniture industry has picked up the pace accordingly.

New England is one of three regions where housing starts by 1986 ''will be significantly higher than 1979 (the last housing peak),'' says Mark Lauritano, a regional economist at Data Resources Inc., in Lexington, Mass.

As for wages hikes, economists disagree over how much of an increase will be coming. The ongoing in-migration will slow the growth in wages, some say. But Mr. Howell at Bank of Boston has a different view.

''The labor markets will remain very tight. There just is not a perception out there that New England has rebuilt itself. In other parts of the country, they still equate New England with worn-out mills,'' Howell says. There won't be a large in-migration, he says, and wages will rise sharply.

What could derail New England's economic prospects? ''An unforeseeable event such as an oil embargo - or a plague of locusts,'' Howell says with a laugh. Such predictions are the province of soothsayers, not economists, he points out.

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