Business mostly bullish on downtrend in US interest rates
Whew! Businessmen are breathing a sigh of relief now that belt-tightening interest rates are beginning to ease up some. Interest rates have tumbled from their peak of 21.5 percent on Dec. 19 to a current rate of 17.5 percent. (A further cut to 17 percent seems likely shortly , since Chemical Bank lowered its rate to 17 percent on Wednesday, March 18).
And bankers and economists expect rates to continue to fall. "I think we will see a 15 percent prime interest rate by summer," says John F. McGillicuddy, the chairman of Manufacturers Hanover Trust, the nation's fourth-largest bank.
"From our point of view, this is a postive development," H. Paul Root, associate economist at General Motors, says, Kenneth S. Axelson, chief financial officer of J. C. Penney, the retailer, adds: "The most direct and important way the lower rates signal a decline in the inflation rate, easing some of the pressure on discretionary spending."
Richard M. Jones, the vice-chairman of Sears, Roebuck & Co., the nation's largest retailer, says that he too believes consumers "will react more positively" as interest rates fall. "It won't be because of actions on our part ," he says, "but because of their feeling about the general business climate."
Even though rates are falling, many businessmen remain skeptical of the drop. Stanley J. Harte Jr., a real estate developer in East Hampton, N.Y., comments: "I'll believe that interest rates are down when they stay down. Personally, I think we're going back up to 25 percent before we go down to 12 percent."
In fact, Mr. McGillicuddy, the banker, says he expects the 15 percent level to be the bottom before rates start climbing again. "Loan demand is slack right now," he explains, "and we don't expect it to start climbing until the fall."
Businessmen are hopeful that the lower interest rates will give them same price relief. For example, Mr. Axelson of J. C. Penney says, "We hope lower rates ease some of the pressures on our vendors who also incur interest costs and that this will work its way through the system and be reflected in the cost of merchandise. This is not a reaction that takes place over a short time frame , but it does happen over a longer period of time."
Donald E. Garretson, vice-president of finance for 3M Corporation, in Minneapolis, points out that, unfortunately, "Profit margins have been squeezed so tightly by inflation and the business cycle that it's likely that any drop in any cost element is likely to be seized as an opportunity to improve profits instead of passed along."
The lower rates have also yet to help the hard-pressed housing sector. The government reported this week that housing starts had dropped nearly 25 percent in February and housing permits were down 6.9 percent. The Federal Home Loan Mortgage Corporation, however, reported that the average mortgage rate stands at 15.4 percent, up from 15 percent in January. At these rates, mortgage bankers don't expect to see much of a spring rebound in housing.
"Even though we've seen a decline of four percentage points in the prime rate ," says Charles B. Fjelland, vice- president and chief financial officer of International Paper, the nation's largest forest products company, "we have not seen a corresponding reduction in the mortgage markets." Thus, companies such as International Paper have yet to see much of a pickup in the lumber and plywood markets.
Mr. Fjelland notes that the higher interest rates have also inhibited customers from building up inventories, since the cost of carrying them was so high. "Hopefully, the lower rates will allow people to borrow to finance working capital and to help business demand," he says.
The high rates have also cut down on capital spending for new plant and equipment. Lower rates could begin to stimulate some new construction. "A reduction of about five percentage points," Mr. Fjelland says, "changes the amount a new project must earn to give the shareholders a better return. Lower rates can qualify more projects for investment." Mr. Root of GM says the decline in rates could help car sales. "We expect car buyers would recognize that we have some economic stability here and would be more willing to undertake debt positions in autos and other big-ticket item's."
Even though rates are coming down, Mr. Jones from Sears cautions against expecting the lower rates to give corporations such as Sears -- which borrow large sums in the commercial paper markets -- a big earnings boost. Last year, he points out, interest rates took a deep plunge in April and May, falling all the way to 8 or 9 percent before moving up again. "We don't anticipate another deep V in interest rates like last year," he says.