New England has settled into an economic funk: Things aren't getting worse, but they aren't getting much better, either.

Residential housing starts remain strong, and the health care, education, and biotech industries continued to do well. Most recently, there are signs that car sales in Massachusetts are picking up.

However, job losses from shrinkage in the defense, computer, and insurance industries continue. And consumer confidence, which had been rising slightly during the summer, fell in October.

"Generally the recovery is not preceding at a pace rapid enough to create new jobs," said Sara Johnson, an economist at DRI/McGraw Hill in Lexington, Mass.

Waiting for a Turnaround

When will noticeable growth return?

Ms. Johnson believes it will start to pick up yearned. But other bankers and economists are not so sure.

While they are hopeful that changes brought on by the Clinton administration will help the region, many don't see a recovery until at least next summer.

"We'll be debating whether we are in or out of a recession for the next 12 to 18 months," said Robert M. Mahoney, Bank of Boston Corp.'s head of New England corporate banking. "The region's [loan demand] is begrudgingly slow." He said Bank of Boston's loans were up between 1% and 2% in the third quarter. That's only the second quarterly increase since the middle of 1989, but it's a lot less than Mr. Mahoney had hoped for.

"It's normal seasonal buildup for Christmas," he said. "The good news is that we haven't seen that in three Christmases.

The bad news is that there is no strength behind that."

Short term, Bank of Boston and many other banks in the region will continue to benefit from the region's sluggishness.

Low interest rates, a byproduct of the recession, are making it easier for them to unload bad assets, and a steep yield curve has spreads at historic widths.

Bank of Boston, for example, saw its bad assets shrink 8.2%, to $1.255 billion, in the third quarter, while Hartford-based Shawmut National Corp. saw a 16.1% reduction, to $1.263 billion.

That's helped earnings. The median return on assets for the 10 largest banks in the region was 0.55% for the third quarter, up from 0.22% in the second quarter, and 0.40% in the first quarter, according to SNL Securities Inc.

Upward Movement

Bank of Boston, for example, earned $70 million, compared with $62 million in the second quarter, and $18 million a year ago. Shawmut earned $13 million, compared with $8.6 million in the second quarter, and $2.3 million a year ago.

BayBanks Inc., meanwhile, earned $10.4 million in the third quarter, compared with $6.5 million in the second quarter, and $1.1 million in the third quarter a year ago. Fleet Financial Group earned $76.6 million, compared with $70.5 million in the second quarter, and $9.1 million in the third quarter a year ago.

Analysts say that the decreasing provisions and reserves for bad loans will continue to drive earnings through next year.

But bankers know that source will run dry eventually, and they aren't optimistic that there will be enough loan growth in 1994 to replace its flow.

Some, like Shawmut and UST Corp., a $2.3 billion banking company in Boston, are beefing up their marketing of mutual funds in hopes of generating more fee income.

BayBanks, hoping to attract new customers, took the unusual step of publishing an ambitious 49-page color catalogue of its products.

Banks are also counting on continued failures to help them pick up deposit market share.

A New Reality

"I just don't see any roaring growth like we saw in the 1980s," said Thomas Pruitt, chief financial officer of Bank North Group Inc. in Burlington, Vt.

Although he said he is starting to see an uptick in consumer lending, he said, "People are beginning to adjust to this [slowness] being the new reality."

Bank North, which has $1.6 billion in assets, earned $1 million, compared with $651,000 in the second quarter, and a $3 million loss a year ago. Nonperforming assets fell 3.6%, to $54.1 million.

"We're not seeing any spurt in employment, and we're still having the lag effect of computer companies laying off people," said James V. Sidell, chief executive of UST.

Mr. Sidell knows just how sluggish the economy is. Nonperforming assets grew 16% at UST in the third quarter, to $159 million, while profits fell to $377,000, from $519,000 in the second quarter.

Industries Hurting

For banks completely dependent on Connecticut's economy, like Northeast Bancorp in Stamford and People's Bank in Bridgeport, the future will be particularly challenging. Its core industries - defense and insurance - are being decimated, and no clear substitute exists to take up the slack.

Northeast, which has $2.8 billion in assets, earned $23.2 million in the third quarter, compared with a loss of $67 million in the second quarter, and a loss of $1.8 million in the third quarter last year.

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