(FORTUNE Magazine) – LIKE a preternatural spring day, the March figures on the economy's performance sent many analysts off into warm reveries. But the putative strengths look good only in comparison with the gloomy expectations that followed the stock market crash. Despite the continuing improvement in the trade balance, the economy is slowing as business tames the immense inventory buildup of late 1987. The tug of war between the improving trade balance and inventory cutbacks is reflected most vividly in the movements of industrial production. Output rose at a modest 2.5% rate in February, compared with an 8% pace in the final three months of 1987. Basic materials were hit hardest, as they usually are during inventory corrections. Cars took a dive as dealers worked off an enormous oversupply. Come summer, total inventory accumulation should get back to sustainable levels. Industrial production should resume climbing at an annual rate of 4% to 5%, and maintain that rate into mid-1989. Only Detroit has actually cut production, and it seems about ready to open the throttle again. Sales have climbed steadily from their October low. Financing subsidies and rebates boosted February sales well above the 7.3 million rate that FORTUNE forecasts for 1988, so dealers' stocks seem a bit low now, though they will fall back into line when the incentives fade. Based on assembly schedules published by Ward's Automotive Reports, output will hold at about seven million in the spring, keeping inventories steady. Sales by other retailers have revived only a bit from their October lows. The storekeepers will be holding down orders to wholesalers and manufacturers in an effort to bring their own inventories into a better fit with sales. It's now clear that the stock crash hasn't brought anything like the debacle in consumer spending that was widely feared. According to the Conference Board, consumer confidence has risen smartly since the postcrash doldrums, though it is still below its peaks. Buying attitudes have also brightened. Car-buying plans are at their highest levels in a year and a half, and appliance- purchasing plans are the highest since last spring. Still, consumers are fairly sober -- for whatever reason -- in making purchases when they don't see bargains such as those car incentives. Homebuilding, often a big plus when the rest of the economy is weak, will not add much to growth over the next year or two. Analysts who hailed the 9% February rise in starts as a turnaround were bemused by the erratic winter housing statistics, which say more about the weather than they do about the economy. Over the past three months, the annual rate of starts has dropped from 1987's 1.6 million to 1.42 million. That's not to say the picture is bad. The 150 homebuilders in 14 cities responding to FORTUNE's semiannual survey are fairly sanguine. They do not regard the three-month figures as the first stage of a downtrend or even as a valid indicator of demand for this year. Their plans for 1988 suggest that starts will climb back to the 1.6 million level before dipping to 1.53 million next year. Those goals seem in line with FORTUNE's forecast. The builders' plans have been good harbingers of starts except in years when mortgages got more expensive or scarcer. Neither of these disappointments is likely this year. Few contractors expect shortages of mortgage money to hamper their operations in 1988. Says a confident West Coast builder: ''We don't even offer a financing package with our homes.'' THE STRONGER FLOW of cash is coming both from savings and loan associations and the mortgage pools generated mainly by federal institutions such as Ginnie Mae. Savings accounts at S&Ls have attracted a lot more money since the crash, generally at the expense of stock mutual funds. (The development has eased somewhat the problems of the sick one-fifth of the industry; see Money & Markets.)

The most important source of money for home buyers these days are pooled mortgages, also called pass-through securities, which accounted for two-thirds of the total last year. Originated by S&Ls and mortgage bankers and then sold on the open market, much like bonds, they have greatly broadened the range of mortgage investors. The pools turned brackish last summer. After mortgage rates shot up, more home buyers went for adjustable-rate mortgages. Many of those stayed in the portfolios of the S&Ls that originated them, since such loans are difficult to bundle into pool securities. At the same time, many pool investors were surprised and disenchanted when their high-yielding securities were repaid as consumers refinanced mortgages to take advantage of lower interest rates. The investors began demanding higher returns on pool securities, raising the cost of mortgage money. Now that rates have gone down, buyers are looking for fixed-rate mortgages again. And investors are willing to put up the money, demanding no more than the normal 1.25-percentage-point spread above Treasury bonds. There will even be enough cash to supply the $60 billion to $70 billion in mortgage-type loans that consumers are borrowing for other purposes. Mortgage rates have dropped 1.5 percentage points since the peak in mid- October. They are now slightly below the double-digit level, and only a point above last spring's lows. In FORTUNE's view the builders are too pessimistic in predicting a fractional rise in rates in the year ahead. We believe that mortgage rates will decline in the next few months, falling nearly to last year's lows and holding at that level until 1989. Then they will rise only gently. Housing's strength is almost entirely concentrated in single-family homes. The builders plan 1,190,000 new ones in 1988, 10% more than six months ago, and 1,150,000 in 1989. True, nearly half the builders say they are taking extra pains to woo buyers. One big reason is that they are trying to sell more house per house. The price of a given-quality house dipped in the fourth quarter. Yet at the same time the price of the average house kept rising at a 7% annual rate. The explanation for this apparent contradiction: Builders have been upgrading since the recession of 1982. The average house sold last year was bigger, made of better materials, stuffed with more appliances -- and cost nearly 30% more. But the builders are clearly wooing well, because nearly half say their sales have increased in the last few months. Only 10% report declines. As a Midwest builder put it, ''I never realized there were so many people willing to make a commitment to buy a home despite what all the experts and studies say.'' FORTUNE's projections of the U.S. economy into the 1990s show that the growing number of households in the prime home-buying group, age 25 to 45, are expanding fast enough to absorb 1.2 million to 1.3 million starts of houses a year. Builders of apartments are not likely to fare as well -- and they know it. ''Multifamily will take a bloodbath,'' says a builder in the South. Our survey indicates that only 400,000 units will be started in 1988. That's a full 85,000 fewer than planned six months ago. Next year's plans are down another 20,000. The problem is a nationwide vacancy rate of close to 8%, vs. the 5% generally considered normal; the 3% difference is the equivalent of one million excess apartments. In the mid-1970s, when the vacancy rate rose only a touch over 6%, starts crashed to a low of 268,000 from their 1972 peak of over a million. And the demand for apartments was growing faster then because of the rising number of young adults looking for temporary digs. Older now, this group is typically searching for new single-family homes. The news is not all bad. Many builders are offering concessions to renters, $ as well as mortgage rates one to two percentage points below the market to buyers. These incentives will surely transfer more of the vacancies to the older buildings. The high vacancies are more geographically concentrated than usual, distorting the impact on total starts. In the South vacancies average 11.4%, while the Northeast has a rate of only 4.3%, low enough to set the hammers swinging. Construction there will offset much of the weakness elsewhere. If demand is soft, it's at least not plunging. Some 63% of all apartments completed in the middle of 1987 (the latest date available) were rented within three months, not much below the 66.5% average of the previous four years. Rent increases have slowed only to 4% a year, from 6.5% over the past decade. The condominium market, which accounted for 135,000 starts in 1986, appears to be holding up in most regions. Only 15% of the builders surveyed said that the stock crash had dampened demand. So at least homebuilding will help economic growth for a few months as construction recovers from the winter slowdown. In a pattern that has become typical of this marathon expansion, assorted weaknesses in domestic demand will continue to plague one sector or another. The steady drive now will come from exports and import substitution. The only question is precisely how much power it will provide.

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: MIXED BLESSINGS Lower mortgage rates will help the mildly optimistic builders of single-family homes -- such as this one rising in Newtown, Connecticut -- who revealed their plans in FORTUNE's survey. But high vacancies will continue to hurt apartment builders. DESCRIPTION: House and apartment starts, 1978-1987, with builders' plans for 1988 and 1989.

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: FORCED MODERATION Manufacturers are easing back in the wake of the huge inventory buildup late in 1987. The restraint will bring output closer to sales, but will not be sharp enough to start a recession. DESCRIPTION: Industrial production, 1986 to February 1988.