Will 1995 be the end of the line for expansion?

As the year-end approaches and we begin planning for the coming year, it is hard to believe that 1995 will mark the fifth year of an economic expansion. The most immediate concerns that arise are very much related to the continued durability of the expansion.

What kind of year will

The most direct reply is positive for both questions. Although the coming year will be considerably less robust that 1994, there's no reason to feel that the expansion will not continue.

There remains a nagging concern by bankers and the public that the expansion just might run out of steam because of old age. This upturn officially began in the spring of 1991 and by the end of 1995 would be reaching the length where five of the previous nine expansions have faltered. But there is nothing magical about any particular time frame when it comes to economic expansions.

The economy does not turn the pages on the calendar each month. Time did not cause even the eight- and nine-year recoveries to end.

The economy turns down when national economic policies change and external shocks hit. Generally the problem is associated with a resurgence in inflation that forces the Federal Reserve to adopt a restrictive monetary policy. So far this expansion has been free of the kind of excesses and irabalances that eventually lead to recessions. The Federal Reserve moved early to preempt the build-up in inflationary pressures.

Growth will be limited in 1995 because the economy was approaching full capacity at the end of 1994. There is much less slack available to support growth. Without an ample margin of excess capacity, the economy is at a crossroads. No longer can businesses continue to speed down the road at an above-average pace. Productive capacity that was so readily available a year ago to provide a buffer for growth is now in use.

Business hiring has sharply cut into the number of available skilled workers. The unemployment rate has dipped down to about 6% nationwide and is much lower for adults. That number obscures the real labor market tightness in many parts of the country. Fully a third of the nation's unemployed are concentrated in the three larger states. Outside of California, Texas, and New York, the U.S. unemployment rate averages just 5.6%. That rate does not provide a lot of protection from labor shortages.

Manufacturing capacity stands at over 85%, which raises a real risk of creating bottlenecks and reviving inflationary pressures. The Federal Reserve Board's attempts to bring growth down to a sustainable, noninflationary pace have been foresighted and well timed. Next year should produce a soft landing if all goes as expected. In other words economic growth will be lowered to a sustainable pace.

Overall business activity will be noticeably less robust in 1995 and the sources of strength will be considerably different. Single-family home building peaked early in 1994 and auto and light truck purchases topped in late 1994. Home furnishings will trail off along with home purchases. Defense activities will continue to feel the pressures of downsizing.

Some sectors will strengthen. Business spending on productivityenhancing equipment, especially computers and electronics, will remain strong. The recovery in Europe and Japan will spur a revival in manufacturing exports and tourist travel to this country.

There will also be more uniform growth among the regions and states in 1995. The recovery to date has been led by strong gains in the South and most of the Rocky Mountain and Pacific Northwest states. Even the Midwest has produced solid gains. Other regions have definitely lagged during the recovery. New England, the midAtlantic states, and California began to improve only after the rest of the nation had largely recovered. Payroll gains in these regions have been weak and unemployment is well above average.

For 1995, some of the stronger regions will slow while the weaker ones will accelerate. The South, however, will again be the strongest region for the upcoming year. One of the forces behind that strength is the continued inmigration to the South as companies seek to benefit from the region's low cost of doing business. The region's major weak spots are centered around defense and oil production.

The Midwest has experienced the fastest phase of the recovery, especially vehicle-driven output. However, business equipment and the export markets will provide the economic underpinnings for 1995.

The Northeast can count on stronger growth in 1995 and will come close to matching the rest of the nation. A solid recovery has taken a long time becoming fully established there. Layoffs will remain a problem at some computer manufacturers but rising exports will be a plus for capital equipment and high tech firms. Highly profitable gambling operations are spreading across the region.

The rapidly growing Rocky Mountain and Pacific Northwest regions will finally begin to cool. The relatively large influx of new residents helped produce a blistering pace during the past two years but this will moderate during 1995.

Finally, California has turned the corner and will help to produce much better balance to both the West and the nation. A better business climate should reduce the heavy out-migration. Only a mild housing upturn will develop given the rise in interest rates.