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JAMES FLANIGAN

Hard Choices, Opportunities Lie Ahead for Nation, State

January 03, 1993|JAMES FLANIGAN

Home prices are now rising in the Midwest, Southeast and some eastern states, notably Pennsylvania. Real estate has stabilized in the Northeast after a five-year decline, but prices are still falling in California.

Nothing lasts forever, though, and California should join the national recovery by this fall, say investment experts, who calculate that the state's economy lags the national pattern by six to 12 months.

The fate of the aerospace business is critical for the state, and that means more than the overall size of the Pentagon budget. California, which lost about 200,000 defense jobs in the last two years, has been slipping also in its share of commercial aviation and civilian space work, says McKinsey & Co., the management consulting firm.

Despite the advantages of a highly skilled work force and an infrastructure designed for the aerospace industry, companies have been moving work out of California because of the state's high costs and complex regulatory environment, says a new study that McKinsey intends as a wake-up call.

With concerted efforts from private business and elected officials, California can maintain its present share of the market--and hold on to $25 billion a year in business and 900,000 aerospace jobs, McKinsey says.

That's not a far-fetched prospect. Southern California companies may well be ahead of the nation in seeing a future for defense work. While others talk only of lower military budgets, firms such as Whittaker and Lockheed are acquiring defense operations that other firms leave behind. Their judgment is simple and clear: In a still-disorderly world, defense will be a good business.

In fact, the U.S. economy will be stronger this year than most people seem to think. Most forecasts see 3% economic growth for the United States, but it will probably be higher--4% or so. That's significant--1% extra growth in the vast U.S. economy means an additional $56 billion in economic activity, which translates into more than 2 million additional jobs.

In other words, with a little luck the U.S. economy this year will regain all the jobs lost during the recession. Under those circumstances, look for a surprisingly strong performance in the stock market. Bond markets will worry over inflation, but interest rates won't rise appreciably.

The picture isn't so rosy overseas. Germany and Japan have been sliding into recession, and there is concern for U.S. exports. But that's not a major threat. Other customers are growing--notably Mexico, which is taking more than $40 billion a year in U.S. goods, almost as much as Japan.

The really big worry is Russia. In the former Soviet Union, "the economy is breaking down," says Richard Conn, a managing partner of the Moscow office of Latham & Watkins, a Los Angeles law firm.

Conn, who helped draw up plans for the economic reforms presented by Finance Minister Yegor Gaidar--whom the Russian parliament rejected as prime minister--says inflation now is 1,000%. The ruble has gone in one year from 60 for $1 to 450 for $1. These figures work out to an inflation rate of 650%.

Unless Russia can pull out of such difficulties, strong men--nationalists, old Communists--will take back power, Conn predicts. Economic and political reforms would be curbed.

Russia would present a tougher face to Europe--and a foreign policy problem that would divert President Clinton from plans for the U.S. economy.

What are Clinton's options? He could send U.S. aid--some of it already authorized by Congress--which would encourage private business investment and support reforms. Still, sending aid to Russia might be hard for a new President in a slowly recovering economy.

But then, hard choices come with Clinton's job, as he takes pains to remind the public.

It was no accident that "Happy Days Are Here Again"--Franklin Roosevelt's theme song from the 1932 campaign--was not played at last year's Democratic Convention, its first omission in 60 years. Yet you may be surprised at the tune you find yourself whistling at this time next year.

The World Economy

The International Monetary Fund projects only anemic growth for 1992 but sees a healthy improvement during 1993. What follows are the latest IMF projections for the worldwide economy. All figures are estimated percent changes, except where indicated.

1992 1993 Real gross domestic product Worldwide 0.8% 2.3% U.S. 2.0% 3.0% Japan 1.6% 2.4% Germany 1.6% 0.6% Canada 1.0% 2.7% Africa 2.0% 3.3% Asia 6.6% 6.4% Western Hemisphere 2.7% 2.0% Eastern Europe -10.4% 2.1% Former U.S.S.R. -18.6% -7.6% World trade volume 4.0% 5.6% Oil prices 0.6% -1.7% London interbank offered rate* 3.8% 3.9%

* In percent rather than percent changed

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