? Will economy turn around?
Don't try to forecast the economic outlook for 1991 before Jan. 15.
The United Nations' deadline for Iraq's withdrawal from Kuwait has also become a deadline of a sort for the United States. The question of war or peace is now the major variable facing economic forecasters as they attempt to put together their predictions for the next year.
If America goes to war, oil prices and inflation will likely soar, at least until the Iraqis are forced out of Kuwait. And the recession is apt to be prolonged.
If an honorable peace does break out in the region, however, oil prices will plunge and economic activity in the United States will almost certainly accelerate. Most analysts believe the current recession will be much shorter and milder if war can be avoided.
But it is the scenarios between those two extremes that have the analysts befuddled.
What will happen to oil prices and to the economy, for instance, if Iraq agrees to only a partial withdrawal from Kuwait--and the worldwide coalition arrayed against him is reluctant to attack? What if Congress refuses to support the Bush Administration's offensive strategy in the region, and the current stalemate drags on throughout the year?
Nobody knows what either situation would do to the economy--and that has plenty of analysts worried. Thus, 1991 has become one of the most difficult years to forecast in recent memory.
What is clear, however, is that the recession that began in the fourth quarter of 1990 will certainly continue well into 1991. Unemployment will, perhaps peak at between 6% and 7% by summer. Interest rates will continue to fall, as the Federal Reserve spurs the economy.
But the questions surrounding war and peace still cloud the outlook, and make it almost impossible to predict exactly when the recession will end.
? Will banks and insurance companies be the next to fall?
In 1990 the commercial real estate business hit a wall causing a free fall in prices in some areas and big losses for banks, especially in the Northeast.
The blood bath is spreading across the country heading into the new year. After defying predictions of doom for a year, California banks should finally start feeling the pinch.
Banks are under increasing pressure to bolster their capital, the financial safety net they must maintain against losses. It isn't easy. Investors shun their stocks, federal officials want huge amounts of money to bolster the ailing deposit insurance fund and profits are being squeezed because banks are setting aside more money to cover bad real estate loans and competition from a glut of banks.
Next year could bring the biggest banking reforms since the Great Depression.
Reforming the deposit insurance system to prevent another savings and loan debacle is expected to be among the Bush Administration's priorities. And new laws could free the industry so that a bank could be bought by an Exxon or General Motors and a Citicorp could enter the securities business to compete alongside Merrill Lynch.
The Federal Reserve board is expected to continue pushing to ease credit and prod banks to lend more to bolster the softening economy. Yet banks still may be reluctant because there are fewer lending opportunities and problem loans and regulatory pressure have made them gun shy.
Federal regulators and banking experts believe the body count of failed banks will grow, including some large failures in the Northeast if the economy there doesn't improve soon.
If banking and thrift problems weren't bad enough for the nation's financial system, a new potential crisis lurks in the insurance industry. One congressional subcommittee study found that "parallels between the present situation in the insurance industry and the early stages of the savings and loan debacle are both obvious and deeply disturbing."
Investments, such as bonds, real estate and securities are souring.
At the same time their investments are souring, insurance companies are paying out more for medical expenses, legal bills and car repairs. In addition, experts argue that the insurance regulatory system is insufficient to deal with big problems.
? Will the U.S. auto industry bounce back?
Low consumer confidence, ever-increasing competition from Japanese auto makers and uncertain oil prices make for a grim outlook for Detroit in '91.
Coming on the heels of an expected Big Three loss of perhaps $1.2 billion in the fourth quarter of 1990, the first few weeks of January will set the tone for the new year: More than 40,000 auto workers are scheduled for temporary layoffs as a result of production cutbacks. The latest first-quarter production schedule now stands 1% below 1990's weak first quarter.
