An outsider's independent assessment of metropolitan Washington's economy can be quite useful in striking a balance between the perspectives of cheerleaders and pessimists.

A new report from Merrill Lynch not only does a nifty balancing act between the two but puts a provocative yet upbeat spin on the current slowdown in the area's economy.

Optimists and pessimists alike should find Merrill Lynch's "Real Estate Economics Special Report" useful in getting through the current slowdown and preparing for the next upturn. It fairly acknowledges primary weaknesses in the local economy but projects sustained growth based on its strengths.

The region's economy is in the process of "down-shifting," Leonard Sahling, first vice president and manager of real estate economics in Merrill Lynch's Capital Markets division, acknowledges in the report.

Nonetheless, Sahling adds, "From the blistering pace of the 1980s, {the region's economy} is moving toward a slower, more orderly, and sustainable growth rate -- albeit one that will still outperform the national economy by a wide margin."

"What I tried to do," Sahling explained from his office in New York, "was show that while there is a slowdown, it's still a healthy economy that will do relatively well over the next decade. There has been a slowdown but I think many people are overreacting."

If that sounds familiar, it's because knowledgeable observers of the Washington-area economy have been saying as much for several months now. The Merrill Lynch report, primarily an independent assessment of the health of the local real estate market, offers further assurances that the sky really isn't falling.

Still it's possible that some might question Sahling's assertions, particularly when he calls the lull in employment growth temporary while describing the slowdown in the local economy as a "permanent development."

In late 1988 and early 1989, says Sahling, "It was clear that the local economy had been growing at an unsustainable rapid pace and that it would slow down."

True enough, but is that really indicative of a permanent development?

Sahling's use of the term "permanent development" is more a forecast of stable growth than a slowdown. He bases his judgment on the emergence of a strong private sector in metropolitan Washington, dominated by growth in business and professional services. The services industry here developed around the federal government but became less dependent on government as Washington became a prime home base for companies that sell their services elsewhere.

That trend was very much in evidence 10 years ago, but growth slowed in the face of a recession in the early 1980s, Sahling pointed out.

Thus, a fair amount of the explosive growth that occurred here in the previous decade was "a catch-up from the early '80s," he said. The local economic slowdown, as he describes it then, is part of a permanent development.

"Washington is on the cutting edge of a nationwide trend -- the shift from manufacturing to services," Sahling said. "Nationwide, this has been going on for the past 15 years. Many large areas in the country have benefited from that shift. Washington has benefited most because it's never had a large manufacturing base.

"This maturation of services growth in Washington -- that's what I meant by a permanent development."

In any event, Sahling projects employment growth locally to taper off to 2.5 percent to 3 percent annually during the 1990s, or about 70 percent to 80 percent as fast it developed in the 1980s.

Those estimates are in line with several projections that have been reported in recent months.

"If that forecast is accurate," Sahling noted in the Merrill Lynch report, "the regional economy will soon regain its footing and then outpace the national economy... . This forecast is based on my conviction that the business and professional services sector, which has been the main engine of growth for the Washington, D.C.,economy, will continue to thrive in the 1990s."

Conditions in the office market, though, are "bound to weaken," Sahling believes. Near-term uncertainties about local real estate markets "lie mainly on the downside," he said.

The key, he added, is whether local lenders will be able to "muster enough self-restraint to curb commercial construction in line with the prospective slowdown in net absorption."

That's precisely what local lenders are doing, though they are being criticized, along with bank regulators, for contributing to a so-called credit crisis.

Still, net absorption of office space in the Washington area -- 10 million square feet annually -- is a "rather remarkable development" in Sahling's opinion.

"It equals that of the whole Los Angeles basin, where the economy is three times bigger than that of the Greater Washington, D.C. area," he said.

The area's real estate market remains fraught with risks, Sahling points out. "In the face of this and the slowdown in the Washington area, construction must be slowed," Sahling cautioned, as he did in the Merrill Lynch report.

"Unless local developers sharply curtail new construction," he wrote, the area's real estate markets "will soon be plagued by the same distress that has surfaced in such places as Phoenix and New England."

Given the consequences of overbuilding in a slowing economy in New England, it is a warning that shouldn't be taken lightly.

"Developers in New England ignored the warning signals that were flashing at year-end 1988 and continued to build at a brisk pace," Sahling recalled. "Conditions went quickly from mediocre to bad to calamitous."

Fortunately, said Sahling, most Washington-area developers and lenders are responding in a manner that should prevent what occurred in New England from happening here.

"That's going to be the saving grace of Washington in the long run."