Slow and steady recovery seen.

Chicago -- Economists are expressing a cautious optimism for the Midwest as the region travels from the "Excess Eighties" into the "Payback Nineties."

While economists are predicting a slow economic recovery for both the region and the nation, they are upbeat about the fact that much of the Midwest will come out of the latest recession relatively unscathed, compared with other regions.

One of the reasons for their optimism is that the public and private sectors in the Midwest have less to pay back than in other parts of the country. For example, governments refrained from some of the excesses exhibited in other regions, such as the New England states that built up massive budget surpluses and initiated ambitious programs to spend the money.

"The Midwest, because it was in economic turmoil for a long time, did not commit itself to these expense streams," said Diane Swonk, regional economist at First Chicago. She added that the region had planned for more trouble raising revenues, given its past recessionary experiences.

In the private sector, the boom in commercial real estate was not as great in the Midwest as in New England, Texas, and California. Those regions saw a substantial build-up in their real estate markets that turned into a bust when last year's recession hit.

"Real estate has been holding up well, which is a key indicator of the future potential revenue for state and local governments, since it impacts sales, income, and property taxes," explained Richard Ciccarone, a senior vice president and manager of fixed-income research at Kemper Capital Markets.

The Midwest also learned a number of lessons from the recession of the early 1980s and put them to good use during the latest economic downturn.

Mr. Ciccarone said, "Governments responded more favorably this time around with [Midwest] states having more rainyday funds than anywhere else in the country."

On the economic front, manufacturers that suffered at the hands of killer inflation during the 1980s became "lean and mean," explained Kenneth Mayland, chief economist at Society Corp. in Cleveland.

Combined with a cheap dollar, these manufacturers were able to become competitive in world markets. "Consequently, the export sector of the country and the region has done magnificently since 1987," Mr. Mayland said.

Above the National Average

He said that while in past recessions the Midwest had a tendency to perform worse than the national economy, the region actually was above the national average in both manufacturing and nonmanufacturing employment during the latest one.

In fact, a recent publication by the Federal Reserve Bank of Chicago reported that the Midwest in May outpaced the nation in manufacturing activity by the widest margin since the fall of 1988. According to Mr. Ciccarone, continue strength in that area would be supportive of the region's municipal bonds.

On a state-by-state basis, particular manufacturing sectors -- like auto production in Michigan and defense industries in Missouri -- helped drag down the local economies. Over all, however, economists agree manufacturing exports will continue to be a positive factor for America's Rust Belt.

Ms. Swonk pointed to trade opportunities in Europe, particularly in Germany, and potential markets in Mexico if the free trade agreement with the United States is ratified.

These countries "will need capital goods up front," she explained. "Where do they make capital goods? The Midwest. It all shapes up to be a very important factor for the Midwest economy."

The region's agricultural industry also could see a boost from exports, particularly with the Bush administration's apparent willingness to increase agricultural credits to the Soviet Union, Ms. Swonk said.

However, economists are not seeing a gangbusters recovery in their crystal balls like the one the country experienced in the mid-to late-1980s.

David Littmann, a first vice president and senior economist at Manufacturers National Bank of Detroit, said that on a scale from one to 10, with 10 being the most severe, this last national recession scored a four.

But if recoveries are similarly rated, with 10 being the strongest, Mr. Littman added, "the recovery at best will rank as a three in my estimation." He blamed the low growth potential on higher taxes, increased regulation, and other debilitating factors.

Mr. Littmann said the economic performance of the Midwest will not outpace that of the nation but simply mirror its sluggish growth.

Poor Per Capita Income

Another handicap for the Midwest can be found in its "poor showing" in terms of per capita income over the last decade, according to Mr. Littmann, who called per capita income "the best gauge" of a population's well-being and ability to pay for its existing structure.

Ten of the 11 Midwest states lost ground in keeping pace with the nation's per capita income from 1980 to 1990, with Michigan, Ohio, Wisconsin, and North Dakota among the worst performers, according to statistics from Manufacturers National Bank. Nine of the 11 states that comprise the region entered the 1991 recession with per capita incomes anywhere from 2% to 19% below the national average.

A slower recovery will mean incomes, and therefore tax revenues, will not go up as quickly for state and local governments. Ms. Swonk said. Cuts in federal dollars to local governments also will increase pressure on budgets, forcing governments to raise taxes, she added.

"Cutting expenses from state and local governments is hard. Who do you cut? Who do you tax? All these issues are going to be harder and harder decisions in the 1990s," Ms. Swonk explained. "It's inevitable that taxes will go up to some extent to keep anywhere near the same level of service [provided] by state and local governments in the past."

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