Economists see likely rates rise

Press, 20 February 1989, Page 13

Economists see likely rates rise

By

ROGER FILLION

NZPA-Reuter New York Progress in trimming the U.S. trade deficit this year will move at a slower pace than in 1988, a factor likely to prompt the Federal Reserve to raise interest rates to cool import demand, economists said on Friday.

The Commerce Department reported on Friday that the U.S. trade deficit in 1988 shrank to $U5137.34 billion, its lowest level in three years. The deficit in 1987 stood at 3U5170.32 billion and much of last year’s progress was attributed to faster growth in exports than to trimming America’s appetite for imports. But the export boom appeared to level off towards the end of 1988, leading some economists to conclude that the strides the country made in its trade balance have stalled.

Economists expect the trade deficit to shrink between SUSS billion and 3USIS billion this year — good but not as impressive as the SUS 33 billion decline achieved in 1988. Economists reckon that two factors will hamper progress in trimming the deficit: a lack of spare manufacturing capacity which will make it more difficult to increase exports and a healthy domestic demand that will only be tempered by a rise in interest rates. "It’s going to be much harder to produce further improvement,” said John McAuley, economist at Richard Wrightson and Associates.

The net result is expected to be added pressure on the Federal Reserve to push up interest rates, both to curb the nation’s appetite for imports and to make additional manufacturing capacity available for exports. Barring a recession, progress in 1989 is not expected to match that of 1988, economists said. "There’s going to be some further improvement, but it’s going to pale by comparison,” said Mr McAuley.

Data Resources Inc has a more bearish outlook, predicting virtually no shrinkage in the trade deficit, while Chemical Bank economist, Joseph Carson, is more optimistic and forecasts the deficit to fall by SUS3O billion thanks to robust exports and slowing imports. Economists were cheered by the slight reduction in the December trade deficit, which < narrowed slightly to 3USU.B9 biHion from 3U512.22 billion in November. But they found few other positive signs in the monthly report. / “It confirms that easy gains have been achieved, and that further improvement will be much harder to come by,” said Data Resources economist, Cynthia Latta.

Economists are worried about the strong pace of imports, which rose 3.3 per cent to a record 5U541.09 billion in December. Imports of cars rose to SUSB.4 billion from SUS 7.7 billion in November, while imports of non-car, non-food consumers goods climbed to SUS9.S billion from SUSB.B billion. So far, efforts by the Federal Reserve to tighten credit to slow the economy are bearing little fruit. “They’re not getting any slowing in domestic demand,” said Stephen Roach, senior economist at Morgan Stanley and Co. Economic data for January, including a surge in non-farm jobs and strong retail sales, all suggest the U.S. economy began 1989 on a strong footing — likely to complicate efforts on the trade deficit. “It’s hard to make further rapid improvement in an economy where domestic demand is still rising nicely,” said Robert Dederick, chief economist at Northern Trust Co. in Chicago. “Until that occurs,” added Mr Roach, who foresees higher interest rates, “we’re going to be stuck with trade deficits that remain unacceptably wide.”