The Big Question of 1991 : The economy took lots of lumps in 1990, and 1991’s direction is far from certain.Will there be a mild recession or a protracted round of layoffs, business failures and disrupted lives?

? Will economy turn around?

Don’t try to forecast the economic outlook for 1991 before Jan. 15.

The United Nations’ deadline for Iraq’s withdrawal from Kuwait has also become a deadline of a sort for the United States. The question of war or peace is now the major variable facing economic forecasters as they attempt to put together their predictions for the next year.

If America goes to war, oil prices and inflation will likely soar, at least until the Iraqis are forced out of Kuwait. And the recession is apt to be prolonged.

If an honorable peace does break out in the region, however, oil prices will plunge and economic activity in the United States will almost certainly accelerate. Most analysts believe the current recession will be much shorter and milder if war can be avoided.

But it is the scenarios between those two extremes that have the analysts befuddled.

What will happen to oil prices and to the economy, for instance, if Iraq agrees to only a partial withdrawal from Kuwait--and the worldwide coalition arrayed against him is reluctant to attack? What if Congress refuses to support the Bush Administration’s offensive strategy in the region, and the current stalemate drags on throughout the year?

Nobody knows what either situation would do to the economy--and that has plenty of analysts worried. Thus, 1991 has become one of the most difficult years to forecast in recent memory.

What is clear, however, is that the recession that began in the fourth quarter of 1990 will certainly continue well into 1991. Unemployment will, perhaps peak at between 6% and 7% by summer. Interest rates will continue to fall, as the Federal Reserve spurs the economy.

But the questions surrounding war and peace still cloud the outlook, and make it almost impossible to predict exactly when the recession will end.

? Will banks and insurance companies be the next to fall?

In 1990 the commercial real estate business hit a wall causing a free fall in prices in some areas and big losses for banks, especially in the Northeast.

The blood bath is spreading across the country heading into the new year. After defying predictions of doom for a year, California banks should finally start feeling the pinch.

Banks are under increasing pressure to bolster their capital, the financial safety net they must maintain against losses. It isn’t easy. Investors shun their stocks, federal officials want huge amounts of money to bolster the ailing deposit insurance fund and profits are being squeezed because banks are setting aside more money to cover bad real estate loans and competition from a glut of banks.

Next year could bring the biggest banking reforms since the Great Depression.

Reforming the deposit insurance system to prevent another savings and loan debacle is expected to be among the Bush Administration’s priorities. And new laws could free the industry so that a bank could be bought by an Exxon or General Motors and a Citicorp could enter the securities business to compete alongside Merrill Lynch.

The Federal Reserve board is expected to continue pushing to ease credit and prod banks to lend more to bolster the softening economy. Yet banks still may be reluctant because there are fewer lending opportunities and problem loans and regulatory pressure have made them gun shy.

Federal regulators and banking experts believe the body count of failed banks will grow, including some large failures in the Northeast if the economy there doesn’t improve soon.

If banking and thrift problems weren’t bad enough for the nation’s financial system, a new potential crisis lurks in the insurance industry. One congressional subcommittee study found that “parallels between the present situation in the insurance industry and the early stages of the savings and loan debacle are both obvious and deeply disturbing.”

Investments, such as bonds, real estate and securities are souring.

At the same time their investments are souring, insurance companies are paying out more for medical expenses, legal bills and car repairs. In addition, experts argue that the insurance regulatory system is insufficient to deal with big problems.

? Will the U.S. auto industry bounce back?

Low consumer confidence, ever-increasing competition from Japanese auto makers and uncertain oil prices make for a grim outlook for Detroit in ’91.

Coming on the heels of an expected Big Three loss of perhaps $1.2 billion in the fourth quarter of 1990, the first few weeks of January will set the tone for the new year: More than 40,000 auto workers are scheduled for temporary layoffs as a result of production cutbacks. The latest first-quarter production schedule now stands 1% below 1990’s weak first quarter.

Analysts and auto executives generally forecast a 5% sales decline in ‘91, from 1990’s disappointing 14.2 million total. GM and Ford are imposing general belt-tightening measures, though Chrysler is seen as having already taken many of the cost-cutting steps it needs to get through a recession. Ford and GM are likely to cut their dividends, analysts say.

If U.S. vehicle sales decline to the predicted level, all three U.S. auto makers may lose money on U.S. operations, some analysts warn. But others forecast a marked upturn in car sales and Big Three earnings in the second half of 1991 as the economy begins to recover. GM, Ford and Chrysler may make a profit for the year, analysts say.

The industry’s would-be fortune tellers admit the most painstaking analysis could go up in smoke if war breaks out in the Persian Gulf.

But war or no war, recession or no recession, the Big Three will have to cope with intense competition from the seemingly irrepressible Japanese auto makers. The success of the Japanese, whose 29% of the U.S. car market is increasingly due to growing production in the United States, has created serious car-building overcapacity in this country and made profitability for most auto makers a dicey proposition.

? Will world trade revive?

The breakdown of world trade talks in December raises the specter that the new year will see a new round of retaliation and trade wars, undoing much of the progress made in recent years.

Although negotiators are scheduled to return to the bargainning table in mid-January, the GATT (General Agreement on Tariffs and Trade) talks will resume only if there are reasons to expect progress. That will require a softening of positions held by member countries--quite a feat under the circumstances.

The Uruguay Round of talks--the most ambitious in GATT’s 43-year history--broke down in part because of the European Community’s refusal to significantly lower agricultural subsidies.

There are “very dangerous implications” for the entire world trading system if the talks are not revived, Secretary of State James A. Baker III has said.

For developing nations, the breakdown of GATT could make it more difficult to export enough goods to pay off existing foreign debt and demonstrate their worthiness for additional debt. International trade in services will have to rely on bilateral negotiations, which are “more cumbersome, costly and much more complicated,” said Sebastian Edwards, professor of business economics at UCLA’s Anderson School of Management.

“One of the big problems if the round fails is that the environment for dealing with trade issues in the U.S. will become much more harsh,” said William Krist, vice president for international affairs at the American Electronics Assn.

? How will workers fare?

For everyone who earns a paycheck--not merely the hourly worker, but the salaried professional and middle manager--1991 is likely to be fraught with more anxiety than 1990.

Start with salaries.

The recent increase in inflation is unlikely to feed through to wages, analysts say, because businesses are obsessed with keeping labor costs low in the competitive global marketplace. Salaries will increase about 4% while inflation--driven primarily by oil prices--will run at nearly 6%, according some labor experts.

The impending recession will increase the already sizeable number of companies that are laying off workers--and not just blue collar workers--possibly pushing unemployment as high as 7.5% by midyear.

For labor unions, it will be a year of hard bargaining.

Most workers who strike may be in danger of losing their jobs. More than 80% of surveyed employers say they would consider hiring permanent replacements in the event of a strike.

So, what is the upside?

The 1989 federal plant-closing notification law entitles workers in business of 100 or more employees to 60 days warning before being laid off. Congress may try to help minorities, parents, and union members.

It’s likely that the 102nd Congress will pass two bills that also passed the 101st Congress, only to be vetoed by President Bush: a civil rights bill that could dramatically expand the rights of workers to sue their employers on the basis of racial, sexual or religious discrimination, and a child-care bill requiring employers to grant unpaid leaves of absence for pregnancy and other family matters. Congress may also try to ban the hiring of permanent replacements during strikes, but Bush is almost certain to veto such a bill.

AUTO INDUSTRY PROFITS Third quarter net income In billions General Motors Corp. 1989: $0.517 1990: $1.90 Ford Co. 1989: 0.477 1990: 0.102 Chrysler Corp. 1989: 0.331 1990: -0.214 Total 1989: .0013 1990: 2.1 Source: company reports HOUSING STARTS Seasonally adjusted annual rate in thousands of units from December, 1989, to December, 1990 Dec. (-5.6% change) 1.273 Jan. (23.2%) 1.568 Feb. (-5.10%) 1.488 Mar. (-12.2%) 1.307 April (-7.0%) 1.216 May (-0.8%) 1.206 June (-1.4%) 1.189 July (-3.0%) 1.153 Aug. (-1.9%) 1.131 Sept. (-2.2%) 1.106 Oct. (-6.6%) 1.033 Nov. (9.3%) 1.129 BANK FAILURES

Year Number Total Assets 1985 116 $2.8 billion 1986 138 $7.0 billion 1987 184 $6.9 billion 1988 200 $35.7 billion 1989 206 $29.2 billion 1990 167 $15.8 billion

Source: Federal Deposit Insurance Corp. AUTO MAKERS’ MARKET SHARES Auto makers that manufacture cars in the United States and the share of the domestic new-car market each of them had as of Nov. 30 of each year.

Company 1990 1989 General Motors 45.6% 46.4% Ford 27.3% 29.8% Chrysler 11.5% 13.0% Honda 6.9% 5.4% Toyota 5.0% 2.9% Mazda 1.1% 0.6% Mitsubishi 0.7% 0.4% Nissan 1.6% 1.5% Subaru 0.2% 0.0% Hyundai 0.3% 0.0% Volkswagen 0.0% 0.1%

Source: Ward’s Automotive Reports