Northeast Confronts Economic Slowdown

Performance is poor in sectors that led boom

THE Northeast, which in recent years has economically outpaced the rest of the country, has gone from economic leader to laggard. ``Activity here has slowed at a faster pace than in the country as a whole,'' says Wayne Ayers, chief economist at the Bank of Boston. ``Eastern Massachusetts and New York City are in a recession, if there were such a thing at the regional level,'' says Gary Ciminero, chief economist of Fleet/Norstar financial group in Providence, R.I.

The very sectors that fueled the region's recent boom - defense, high tech, and financial services - are the same sectors now leading the slowdown.

The commercial real estate and condominium markets have collapsed. Wall Street brokerage firms have never recovered from the effects of the October 1987 stock market crash. Regional banks are hurting, and one of the largest - Bank of New England - is fighting for its very survival.

``Things are tougher than they have been since the 1970s,'' says Daniel Bayer, vice president for economic development of the New York City Partnership, a business group.

The slowdown is playing havoc with state budgets as revenues plunge. Every Northeast state is affected. Massachusetts faces an estimated $710 million budget deficit in fiscal 1990 which has led to political stalemate and rock-bottom bond ratings. New York is looking at a $1.5 billion deficit, while New Jersey's is projected at $592 million.

To understand what has happened to the Northeast, economists say, you have to understand why things were so good.

``In the early part of the decade, this region benefited from a set of unique circumstances: the defense boom, the globalization of the world economy, the deregulation of financial services, and the maturing of the high-tech sector,'' Dr. Ayers says. ``As a result you got a booming real estate market.''

In fact, New England got twice the national average in defense funds for weapons procurement and three times the average for missiles, says Ann Markusen, director of the Project on Regional and Industrial Economics at Rutgers University at New Brunswick, N.J.

But defense spending leveled off in the mid-1980s. The regional high-tech industry, centered around mainframe ``minicomputers,'' began to run into competition from smaller personal computers manufactured elsewhere. The 1987 stock market crash began a downward slide in the financial services sector, which was made worse by the real estate collapse.

``Given that, we are seeing about what we would expect to see in the real estate market,'' Ayers says. ``When you grow faster than the average, you can expect to slow down faster than the average.''

Many expect the Northeast's downturn to continue at least through this year. Recovery will be slow, they say.

``A lot will depend on what happens with public policy,'' says Christopher Ruhm, an economics professor at Boston University.

The states face tough choices. If they raise taxes to meet deficits, they will make the region less competitive. If they cut spending, the cuts in services and employment will have negative effects.

``Some see hopeful signs of a turnaround,'' says James Gifford, executive vice president of the New York Chamber of Commerce and Industry. ``At best, we're looking to a year when we think state and municipal governments must be careful in estimating revenues.''

Dr. Markusen says regional recovery depends on the national economy. ``The region will be disadvantaged by high costs and a relative lack of dynamic sectors,'' she says.

But the region has some advantages over the long term. ``Looking four to eight years out, we feel New York City is fairly well placed. The economy here is information- and service-oriented, and the world trend is in this direction,'' Mr. Bayer says.

``We have a diverse industrial mix and an educated labor force,'' says Ayers. ``We still have a tight labor market. In time, the slowdown itself will help restore our competitive position.''

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