The national economy is very weak and teeters on the brink of slipping into recession again. The latest report indicates that the real GNP grew at an annual rate of only 2.4 percent for the July‑September time period. After three consecutive periods of contracting GNP, this was the first quarter of positive economic growth. Usually when the economy comes out of a recession, the expansion rate is much higher, e.g. 6 percent. The expansion thus far is so weak by historic standards that many analysts believe the national economy is on the verge of tumbling back into recession. The question is why the expansion rate is so puny, and why might the nation slip back into recession. 

     There are numerous factors holding the expansion back and which might yet cause the country to plunge back into recession. First there are the high debt levels of households and businesses. The debt piled up during the 1980s by households and businesses has limited the amount and rate of consumption and business investment. This situation will take years to resolve itself and is not likely to vanish any time in the near future. 

     Second, many parts of the country have experienced a collapse in real estate prices decreasing the wealth of many individuals and businesses. To make up for this loss of wealth, many individuals and corporations are being forced to cut back on expenditures in order to replace the lost value of their real estate holdings. Further the collapse reduces collateral values which in turn reduces the ability of firms and individuals to borrow funds. 

     Third, many parts of the country have experienced noticeable job losses resulting from cutbacks in military expenditures. New England and the West Coast are prime examples of this new reality. In the long‑run the country will undoubtedly benefit from a reduction in military spending, but the adjustment process is going to be slow and quite painful for many parts of the country. 

     Fourth, the recovery may be weak or worse yet, the country may slip back into recession because of fiscal policy action on the part of the federal government. The federal budget deficit is projected to be over $300 billion for fiscal 1992. Thus little additional stimulus seems possible unless the government wishes to risk the wrecking of the nation's financial health. Nor are the states in any position to prime the economic pump. With the federal government cutting back aid to states and revenues declining as a result of the recession, many states are themselves running budget deficits. Since most states are required by law to balance their budgets, taxes must be raised or expenditures reduced. Neither of these courses of action will aid in ending the recession, in fact they may contribute to a further weakening of the economy. 

     Fifth, monetary policy appears to be the only card that can be played at this juncture in time. However, there are serious questions as to how effective monetary policy can be in stimulating the economy when the demand for loanable funds is so weak. Lowering short term interest rates does affect the borrowing behavior of individuals and firms, but many other economic factors enter into the decision‑making process, and are more important in determining the overall profitability of the project. 

     Further there is evidence to suggest that federal regulators, in their zeal to avoid another savings and loan disaster, have so intimidated other types of financial institutions that they are hesitant to provide the necessary credit and financing that would help the economy move forward. 

     Thus, given the aforementioned problems, it is highly improbable that the national economy will exhibit much strength in the upcoming year. However, many of these problems are not so readily apparent in the Midwestern states. For that reason many economic forecasters are projecting this part of the country to be an economic winner relative to other sections of the United States. Specifically, debt levels in the Midwest for businesses and households are not nearly so severe a problem. Financial and real estate speculation were not rampant in this part of the country, and the Midwest has never been overly dependent on construction activity. This area has also never relied to a great extent on defense contracts for employment growth. Also the states in this part of the country have managed to avoid the extensive budget deficits endemic to other parts of the country. These reasons coupled with stable energy prices resulting from the Gulf War should allow the conservative Midwest to emerge as a relative winner in the 1990s.