Paying The Bill for the Party Next Door

By John E. Gallagher

DRIVE 70 AND FREEZE A YANKEE. That popular Texas bumper sticker epitomized the bitter regional rivalry of the 1970s, when rising energy prices impoverished the Snow Belt and enriched the Sunbelt. With this summer's oil shock, those feelings could come flooding back. The Northeast is already in a recession, suffering from such maladies as plummeting real estate prices and rising unemployment. The Southwest, by contrast, is beginning to bask in the glow of resurgent economic health. Rising oil prices, coupled with a possible shift in wealth because of the savings and loan bailout, may only serve to aggravate the differences between North and South.

Nowhere is the potential upswing in financial fortunes more dramatic than in Texas. In the late '70s, when oil reached $34 per bbl., Northerners fumed while Energy Belt entrepreneurs got rich. The decline of oil prices and the collapse of inflated real estate values culminated in the 1986 crash that battered the state economy. Even though Texas is diversifying to lessen its dependence on oil production, the state could benefit once again from high- cost fuel. In new revenues alone, each $1-per-bbl. increase would bring $50 million into state coffers. Stephen Brown, a senior economist for the Federal Reserve Bank of Dallas, estimates that if oil remains at $22 per bbl. or better, the economic stimulation would create another 50,000 jobs in the state. At week's end West Texas crude was trading at more than $26 per bbl.

By some accounts, Texas will be the largest single beneficiary of the gigantic S&L bailout. A controversial study by Edward Hill, a professor at Cleveland State University, predicts the cleanup will pump about $80 billion into the Texas economy. A dozen other states, mostly in the Southwest, would also profit. Politicians from the Northeast and Midwest complain that their states would foot almost half the bill but see only 5% of the initial bailout money, as opposed to 72% in Texas.

That huge transfer of wealth does not sit well with Northeasterners, who face a gloomy future because of cutbacks in the defense, financial and high- tech industries. Retail sales in New England are flat or falling. In the five-month period ending last May, New York City and northeastern New Jersey lost 15,000 private-industry jobs, their first drop in such employment since 1982. Economists believe a lasting increase in oil prices would hit the area hard. "It would deepen and prolong the downturn here," says Wayne Ayers, chief economist for the Bank of Boston.

In other regions of the U.S., the outlook varies from bleak to rosy. The Southeast is edging close to a recession. Building construction in Atlanta is off, while furniture manufacturers in the Carolinas have been struggling to survive. Demand is falling for real estate in some Florida retirement havens as homes in the Northern states become more difficult to sell. Since the Southeast has relatively few energy resources, rising oil costs will mostly hurt the region. "Before the Iraqi invasion, I thought we would escape the recession. Now it will be close," says economist Al Smith of NCNB, a banking company in Charlotte, N.C.

The forecast is better for most of the Western and Midwestern states, where growth has been solid, if slow. Housing markets from Indianapolis to Lincoln, Neb., have enjoyed price increases averaging 10% or better, while Idaho has the fastest-growing real estate market in the U.S. Problems dot the map, however. In once booming Los Angeles, housing construction fell nearly 50% in the first six months of the year, and thousands of workers have lost their jobs to defense-industry cutbacks. Still, energy-rich California may be helped by rising oil prices.

Well-off states cannot afford to gloat too much. If the oil shock manages to push the U.S. into a bona fide recession, regional benefits will mean little. Says Robert Dederick, chief economist of Chicago's Northern Trust Bank: "Hard times move quickly from one area of the country to another. No one is immune."

With reporting by William McWhirter/Chicago and Richard Woodbury/Houston