Consumer outlook brightens as interest rates continue to fall. Economy still has room to grow before inflation becomes a worry
The sun is shining on the American consumer, as economists see it. Interest rates are down -- near a five-year low. Oil prices are weak. Wage increases in the first quarter were up handsomely. Tax reform, if passed, will save most taxpayers money.Skip to next paragraph
Subscribe Today to the Monitor
And economists expect major banks to trim their prime rates, the interest rates banks charge their better customers, any day now.
Now is an excellent time to buy a car or a house, suggests Lacy H. Hunt, an economist with the brokerage firm of C. M.&M. Group Inc.
Moreover, he figures the economy should pick up in the second half and provide ``a very strong labor market, with increased job opportunities.''
Frederick Breimyer, chief economist at State Street Bank & Trust Co., says that those with high interest rate mortgages might find this an opportune moment to refinance their homes. Fixed rate, 25-year mortgage money is now available for around 11.9 percent.
Banks, finance companies, and others extending consumer loans are slow to drop their interest rates, notes William N. Griggs, of Griggs & Santow Inc., New York financial consultants. The costs of extending small loans through credit cards or other consumer-type loans are high. Nonetheless, Mr. Griggs says he expects these ``administered rates'' to fall ``over time'' if market interest rates stay low.
The decline in interest rates is a surprise for economists.
Last December a consensus of more than 40 economists compiled by Blue Chip Economic Indicators put the three-month Treasury bill rate at 9.6 percent on average this year. On Tuesday, the Treasury sold $7 billion of such bills at a discount rate of 7.03 percent.
Oil markets also got a surprise. Iran, which earlier this year had been exporting crude at a rate of around 1 million barrels a day, boosted its output in May to between 2.4 million and 2.8 million barrels daily, says a US government source. The result is a glut of oil.
The Organization of Petroleum Exporting Countries (OPEC), fearful of another price decline, has pushed forward a scheduled meeting from July 22 to June 30.
The decision follows recent reports that Britain, Norway, and the Soviet Union -- all major oil producers that do not belong to OPEC -- are preparing to cut their oil prices by as much as $1.40 a barrel.
Griggs says he suspects that spot prices for oil -- prices not governed by long-term contracts -- could fall under $26 a barrel later this year. Oman, not a member of the 13-nation OPEC, this week set the price of its crude oil delivered to term-contract customers in May at $26.15 a barrel, down from $27.35 it charged in April.
However, Griggs adds: ``We shouldn't be counting on tremendous help'' from lower crude prices to keep inflation down in the United States.
The key reason for lower interest rates, the economists figure, is the slowdown in the economy. In the first quarter, the nation's total output of goods and services grew at an annual rate of 0.7 percent. Business spending on plant and equipment, which had been growing at a 20.6 percent annual rate in the first quarter of 1984, plunged to a 2.6 percent growth rate in the same three months of this year. Burgeoning imports ate into the demand for domestic products.
This slowdown worried the Federal Reserve Board, and it has been increasing the nation's money supply quickly, indeed above its targets for monetary growth.
What happens next to the economy is a matter of dispute. Mr. Hunt, of the C. M.&M. Group, holds that the fast money growth will boost output and prices as the year progresses. ``Monetary growth is very high and there is a clear inflationary risk,'' he says.
In real terms (after subtracting the inflation rate), the money supply measure known as M1 (checking and similar type accounts, plus currency) has grown at a 3.2 percent rate for four quarters. That, he says, is faster than at any time since the early 1970s, when inflation took off at a rapid rate.
Hunt figures the current economic weakness is being exaggerated. He says that car and truck sales this year could reach a record 14.5 million to 14.7 million units; that housing starts, at a 1.9 million-unit annual rate, are running at the best pace since 1978; and that employment increased by 1.4 million jobs in the first four months of 1985.
State Street's Mr. Breimyer is less worried about the prospects for inflation. He points out that industry has been using less of its capacity, dropping from between 82 and 83 percent in mid-1984 to 81 percent now. Unemployment remains high at 7.3 percent, he added. Industrial commodity prices have edged down a bit. Nor does he expect a major collapse in the price of the dollar, which would boost the price of imports.
``I don't think there will be any breakout propelling inflation to uncomfortable levels,'' he says. -- 30 --