Economists Say Interest Rates Will Remain Low

UNITED States interest rates - which have fallen consistently over the past year - are expected to stay at low levels this year and next, according to many economists.

That is good news for consumers eager to finance a new house or other big-ticket items; it is not such good news for bondholders eager to attract high yields on their investments.

"There's just not much [current] movement out there right now on interest rates," says Arnold Kaufman, editor of Standard & Poor's "Outlook," a financial publication. "For the immediate period ahead, we think there's room for some further decline in long-term rates. Long-term bonds will come down slightly in yield, recover in the first quarter of 1993, and then not rise much for the rest of the year."

Short-term rates will not change significantly in the immediate future, Mr. Kaufman says.

The outlook for continuing low rates stems from three major factors, economists say: low inflation, minimal pressure on the wage front (given the large number of people out of work); and economic growth.

Indeed, the Commerce Department announced earlier this week that its Index of Leading Indicators, designed to predict future economic activity, edged up only 0.1 percent in July, after tumbling 0.3 percent in June. The modest growth suggested that the US economy is barely growing.

Economists caution that the only real threat to continued low rates is the falling dollar. If the dollar were to suddenly collapse vis-ia-vis other currencies, particularly the German mark, the Federal Reserve Board might be forced to push US rates higher.

Long-term (30-year) Treasury bonds are running at about 7.40 percent. S&P estimates that yields will drop to about 7.25 percent later this year, and then rise slightly, staying at about 7.5 percent throughout 1993.

A number of economists polled by Robert Eggert's "Blue Chip Economic Indicators" newsletter also foresee downward pressure on rates in the months ahead.

The July issue of the newsletter assumed that yields on three-month Treasury bills would be in the 3.8 percent range for 1992. The August newsletter now says that the rate for 1992 will be about 3.6 percent.

Looking ahead, the long-range forecast also dropped; economists polled for the July newsletter estimated that the three-month Treasury bill would be about 4.4 percent next year; the August consensus was downward, to 4 percent.

DRI/McGraw Hill anticipates slightly faster economic growth later this year, following the November election. The reason, says DRI economist David Wyss, is that Washington will likely undertake a stimulative fiscal program, no matter who is elected president.

Even with some upward pressure on rates, the uptick is likely to be modest.

Mr. Wyss sees long-term rates in a yield-range of 7.25 percent to 7.75 percent next year, up only marginally from a yield-range of 7.25 percent to 7.5 percent this year.

One factor helping to hold rates down is a major shift in demographics, says Richard Hokenson, an economist with Donaldson, Lufkin & Jenrette, Inc., an investment house.

Mr. Hokenson says long-term rates will continue to decline, reaching 6.75 percent by next summer. Moreover, long-term rates will fall to about 5 percent later this decade, he says.

THE US economy, Hokenson says, "is in the midst of a major, demographically driven, sea-change."

American women who sat on the sidelines of the labor force during much of the early part of this century have now been largely absorbed into the work force. The birth rate has fallen, which means fewer young people entering the labor force. And future immigration gains are not expected to exceed the net-influx of the late 1980s and early 1990s.

The result, Hokenson argues, is that the US labor force is expected to expand by only 0.9 percent a year in the 1990s, compared to 1.6 percent a year in the 1980s.

Slower labor force growth will hold down overall US economic growth. In the 1990s nominal growth in gross domestic product will average only 4 percent a year, compared to the annual growth of 7.4 percent in the 1980s, Hokenson says. Slower growth, he says, adds up to lower interest rates.