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New England Recovers Slower Than Rest of US

But region's deep slump forces industries to become more efficient. RESTARTING ECONOMY

SIGNS of hope are emerging amid New England's worst recession since the Great Depression.However, the region may not experience a full economic recovery until the end of this decade. New England's recession, which began in early 1989, is far deeper than the national economic downturn. And although the region will make gains over the next year, growth in the first half of the 1990s will lag behind the nation, predicts Sara Johnson, an economist at DRI/McGraw-Hill, an economic forecasting firm in Lexington, Mass. Ms. Johnson says some trends that will tend to slow down the recovery include: high energy, labor, and building costs compared to other regions; restructuring and cost-cutting in key industries such as computers, defense, and financial services; and the effects of overbuilding in real estate markets during the 1980s. "This is not just a cyclical episode tied to the dynamics of the national economy," she says. "This is a period of major structural changes in the region and also major adjustments for the excesses of the 1980s." These structural changes will have a positive impact on the region in the long term and will force industries to become more productive and efficient, say economists. Such cost-cutting measures have been concentrated in the service sector, including financial services, state and local government, and retail, says Lynne Browne, deputy director of research for regional affairs at the Federal Reserve Bank of Boston. "There is a general attempt to become leaner and meaner which is now affecting services," Ms. Browne says. "That's a national development but it's especially powerful here because of the pressures of a weak economy." New England's current recession has meant high unemployment. Johnson estimates the region has lost a total of 557,000 jobs - which will make up about half the jobs lost during the national recession. The regional unemployment rate of 7.7 percent (in August) compares to a low in 1988 of 3.1 percent. In Massachusetts, considered a bellwether state for the rest of the region, it will take the entire decade for the state to reach its peak 1988 employment level, Johnson predicts. Unlike previous regional recessions in 1974-75 and 1981-82 when job losses were concentrated in the manufacturing sector, unemployment has reached into the service sector and white-collar fields. There are signs of hope, however. For one thing, economists agree the region in general has a strong economic base. Some of New England's strongest assets are its world-class educational, medical, and research institutions. Economists point to graduates from schools like the Massachusetts Institute of Technology in Cambridge, Mass., who have shown a strong propensity to stay in the area and launch small high-tech firms. Economists cite several industries in the region that promise future growth: biotechnology, consulting, medical research, environmental technology. A recent report by Harvard University economist Michael Porter and the Monitor Company recommends that Massachusetts build on these strengths to restart its economy. The policy suggestions include: * Put the state's fiscal house in order, boosting government efficiency and restoring lost confidence in the economy. * Provide investment incentives, including favorable state tax treatment for capital gains from equity investments held for five years or longer. * Enhance the state's position as a technology capital through tax incentives on research. * Develop a human resources strategy for the state, including a streamlined school governance system and better teaching of both basic and applied skills. * Become a showcase for environmental quality and energy conservation through creative regulation. This could improve living standards and foster new businesses, turning the region's high energy costs into a strength. Massachusetts already ranks fifth in the nation on DRI's "attractiveness index," which measures the contribution of industries such as tourism and recreation, as well as cultural activities and higher education, to a state economy. The areas that rank ahead of Massachusetts are Hawaii, Vermont, Nevada, and Washington, D.C. Bay State Gov. William Weld (R) has emphasized export growth. Though some economists say progress in this area will be difficult, Johnson says strong economic growth in Europe and Japan by early 1992 will help stimulate export demand.