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Interest Rate Surge Will Deal a Blow to Several Key Industries

October 17, 1987|PAUL RICHTER | Times Staff Writer

NEW YORK — The recent surge in interest rates will deal a sharp blow to the auto industry, is already slowing housing starts and sales and promises to retard the corporate takeover activity that, until recent days, has helped buoy the stock market, analysts say.

It is likely to provide little joy to bankers, they say, who fear anything that would add further pressure on questionable debts to developing countries and U.S. farmers.

The prospect of further rate hikes loomed again on Friday, as Marine Midland Bank in New York increased its prime lending rate, and there was renewed speculation that the Federal Reserve Board may soon bump up the discount rate. Marine Midland lifted its prime rate to 9.75% from 9.25%, following the lead of Chemical Bank, which announced a similar increase on Thursday.

Still, predictions that Chemical's move would be followed by most other major banks were not borne out.

The rise in rates, a contributor to investors' flight from the stock market, comes at a particularly inopportune moment for the auto industry, which for most of the year has sought to spur sales with discount financing packages. Despite the discounts, auto sales fell 18% in September from the same period of 1986.

"If you have trouble selling cars with 2.9% financing, you can imagine what it would be like offering them at 4.9%," said David Levy, partner in Levy Economic Forecasts in Chappaqua, N.Y. "The auto companies will have less success, and it will cost them a lot more."

Rising rates are usually felt first in the housing industry, and this cycle is no different, economists say.

The U.S. Savings & Loan Assn. is predicting about 1.65 million housing starts this year, declining to 1.5 million in 1988, compared to last year's 1.805 million. The effective price of a fixed-rate 30-year mortgage, at a low of about 9.1% in March, has been climbing an average of about 0.1 percentage point a week recently, and is now 10.4%, Levy said.

With those increases, home buyers have been rapidly forsaking fixed-rate mortgages for those with adjustable rates. In early September, 54% of home buyers were choosing adjustable-rate mortgages, compared to 22% in early April, noted James Christian, senior economist with the U.S. League of Savings Institutions.

Adjustable-rate mortgages often have special low introductory rates, allowing more people to qualify for them, and typically have lower rates than fixed-rate mortgages available at the same time.

Interest rate increases are likely to be felt also by the millions of Americans, who, exploiting the 1986 federal tax code changes, have this year taken out about $30 billion in home equity loans. Typically, banks grant lines of credit to applicants for such loans. Later, when the homeowner actually borrows from the credit line, he is charged the then-prevailing interest rate.

While these loans are usually used for such purchases as paying medical expenses, improving a home or sending a child to college, those who qualify for them are usually in sound financial condition. "Rising rates will be more annoyance than real hardship for these people," said David Rolley, economist at Chase Econometrics.

The upward drift of rates will also soon be felt in the world of mergers and acquisitions, as it jeopardizes some of the many deals that can be financed only with heavy borrowings.

May Hurt Capital Spending

Analysts said that message was sent in the drubbing of several stocks that have been takeover targets.

Gillette, long the target of raider Ronald O. Perelman, fell $3.875 a share on Thursday and another $3.875 on Friday. Allegis Corp., parent of United Airlines, lost $5.25 a share on Thursday and $4.375 on Friday.

So far, rising rates have not been much of a blessing to the banks, allowing them simply to cover their increased cost of funds. Higher rates will make many bankers nervous because they will increase the pressure on their shaky overseas loans, economists said. They noted that a 1 point rise in the prime rate translates to an increase of $4 billion in the debts owed U.S. banks by less-developed nations.

A hoped-for fourth-quarter upswing in capital spending--corporate investment in major equipment or buildings--may also be aborted by the interest rate rise. Economists had been hoping that a late-year surge in capital spending would lift 1987 capital spending to between 1% and 2% over 1986 levels, said Georges Rocourt, economist with Mercantile Safe-Deposit & Trust in Baltimore.

"It sounds like that may not be realistic for this year, and maybe we shouldn't hope for the 4% gains people have been talking about for 1988," he said.

Henry Kaufman, chief economist for the Salomon Bros. investment house, predicted that only a sudden slowdown in the economy could halt the rise in rates. Writing in his weekly economic commentary, Kaufman said interruptions in the rates' increase would be only temporary "until the market's fear of mounting inflation and accelerating growth are allayed."

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