If you look at Dylan's output in the 80's before Oh Mercy, it was pretty mediocre between 1983's Infidels and Oh Mercy. That's six years. I would hesitate to call any of the albums "good": Empire Burlesque, Knocked Out Loaded, Down In The Groove are all middling at best, each with only a couple standout tracks. He had a pretty bad live rep at the time as well. After the reception to Oh Mercy, he was definitely viewed as in a comeback mode. Under the Red Sky, to be honest, isn't that bad by comparison to those mid 80's efforts from a songwriting perspective (and a few songs were high-quality leftovers from the Oh Mercy sessions), but Don Was as producer was a big mistake, and clipped Dylan's momentum.
Ultimately, I think it was Boner's appreciation of Dylan's recent writing and his recommendation of Lanois that saved Dylan's career, despite the slight detour of UTRS. Had Dylan stuck with Lanois after Oh Mercy I think the 90's would have shown a much more natural evolution, even if UTRS wasn't destined to be as good as its bookending originals albums.