How to cool a turbo-charged economy. When business is racing, higher interest rates may not be enough of a brake
Alan Greenspan, chairman of the Federal Reserve Board, wants to step on the brakes to slow the economy. To see how hard he needs to push, he should visit Ocean County, N.J., which is going over the Fed's speed limit. ``Well, I'm boomin','' says the sales manager at Monmouth Honda where it's so busy the beleaguered man offers to let this reporter help close deals. Across the street at Larson Ford, Gene Chiarella barely has time to look up from his stack of new car forms. The impact of last week's prime rate hike on his business? ``Brought more people in,'' he says with a smile.
And Jack Kelly of Pine Belt Chevrolet - third-largest dealer in the country - says he is still selling a torrid 700 to 750 cars a month. ``A half a point rise in interest rates really does not affect our customers,'' Mr. Kelly says.
What's happening here, some economist believe may be indicative of a broader problem: Cooling off some of the nation's turbo-charged hot spots might be harder than the Fed thinks.
For example, it used to be true that the housing industry was interest-rate sensitive. When rates rose, mortgages became more expensive, knocking some people out of the running for new homes.
Now, says Lyle Gramley, chief economist at the Mortgage Bankers Association, consumers switch to adjustable rate mortgages, which usually have a lower rate in the first year. ``It's taking some of the sting out,'' says Mr. Gramley, a former governor of the Federal Reserve Board, who nonetheless expects the higher interest rates to act as a brake later in the year.
Racheting interest rates will also have little immediate effect on the export side of the economy, which is providing much of the country's zip. The nation's third-largest exporter, Boeing Company in Seattle, says the rising rates are not likely to ground its sales.
``Selling planes is a long-term process,'' says David Jimenez, a spokesman for Boeing. One reason Boeing's sales are not likely to be adversely impacted by rising interest rates is that Boeing is now selling a quarter of its production to leasing companies, which are driven more by tax considerations than interest rate moves.
Another big exporter, Monsanto Company, is also doubtful that Mr. Greenspan's moves will hurt its business. ``There's more demand for our products than there is supply,'' explains Juanita Hinshaw, Monsanto's treasurer.
Auto companies have also found ways to cushion the impact of higher interest rates on consumers by subsidizing the interest rates on loans. Today, Chrysler will sell some of its cars with loans at 6.8 to 9.8 percent financing. ``The prime has to be up over 11 percent before it begins to have an impact,'' says a Chrysler spokesman.
Few economists expect the economy to operate like a perpetual wheel machine - just going on forever. After all, the economy is in the eighth year of an economic recovery - the longest during peacetime. Last year, most economists were pessimistic about 1989, expecting a recession. That view has not changed. According to the June survey of Blue Chip Economic Indicators, about half of the 51 economists surveyed are still expecting a recession next year.
Even without the Fed's actions, some of the froth is being blown off the economy. The strong growth in Ocean County, for example, made it into a real estate developer's paradise. New adult communities and town houses were bulldozed into the area's pine forests with the view that growth would continue at a fast pace.
As of May 29, the Asbury Park Press, a local newspaper, found there were 11,000 houses listed for sale compared with 8,500 the year before.
``We used to write three contracts on a house,'' says Carol Kovach, a real estate agent in Toms River. Now, she blames sharply rising housing prices for the slowdown. ``Salaries just aren't up as much as prices.''
Mortgage banker Jim Clevenger of Ocean National Bank in Point Pleasant says the typical house that sold for $85,000 in 1985 is now selling for $185,000. As a result, he says, the bank's mortgage lending is off 66 percent from last year.
But Keith Goetting, director of the Ocean County Department of Economic Development, says developers are not deterred. ``I just talked to a developer who wants to build 6,000 new houses,'' he says. Higher interest rates? ``That didn't stop our growth in the late 1970s or early 1980s,'' he replies, ``I don't think they will now.''