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Are Lower Interest Rates Hurting the Economy?

September 26, 1991

NEW YORK (AP) _ In theory, lower interest rates jolt the economy forward by lowering costs to producers and consumers, and please investors by supporting higher stock prices.

But while the theory might be sound, its application to the nation’s current problems may be producing unexpected and undesirable effects. Many investors, for example, are furious.

Why? Interest income has become a larger percentage of total income than in years past, perhaps as large as 15 percent of all income, according to some economists. They’re disturbed about this turn of events, a researcher says.

Shouldn’t they be happy that lower interest rates have kept the stock market up? Yes, says researcher Albert Sindlinger, but only 33 percent of Americans own stock, while 78 percent of them have interest income.

Sindlinger, whose researchers query nearly 4,000 heads of households a month about their personal finances, believes the policy of lowering interest rates, mainly a product of Federal Reserve actions, is boomeranging.

But, you say, lower rates are helping homeowners refinance and thus cut costs. Yes, he replies, but lower rates allow only 7 million families to benefit from refinancing vs. 70 million who lose interest income.

Besides, other consumer rates have remained high. Sindlinger, who is based in Wallingford, Pa., points to bank-card borrowing rates, many of which remain near 20 percent and some of which have risen rather than fallen.

With dividend income also weak, Americans have less ″gift money″ to use. When available, he says, such funds typically are used to buy automobiles, houses and securities. By his measurements, Americans are now suffering the first year-to-year decline in gift money in 40 years.

No wonder, he says, that the application of lower interest rates has failed to produce the results expected. In the old days, he said, you could depend on lower rates to produce economic activity, but not this time.

Because consumers can’t or won’t spend, manufacturers aren’t expanding production, which they might be expected to do in an economy emerging from recession. And much consumer buying, he observes, is of imported goods.

If Sindlinger is correct, the explanation might provide some insight into the failure of the economy to get moving. Sindlinger’s thesis might also help explain a curious erosion of President Bush’s standing with investors.

Last March, Sindlinger found that 92.1 percent of investors had positive feelings about Bush. By mid-August the percentage had fallen to 70.8 percent. In mid-September it was down to 55.8 percent. This week: 53.7 percent.

At the same time, the percentage of investors expressing negative feelings about Bush had risen to 42.8 percent. A month ago, the percentage was just 28 percent, and last March a mere 4.3 percent. This week: 44.6 percent.

The findings do not surprise Sindlinger. They are the voice of the people, he explains. ″All I do is measure what people say,″ he explains.

But he also interprets, based on experience that goes back to the Great Depression - but with a difference, he says. Too many economic observers today, he says, impose their own views on data instead of listening to the message.

His political interpretation of the measurements suggests trouble ahead for the President’s re-election campaign. Americans are distressed, he says, and they view the administration as without a viable domestic economic policy.

By his measurements and interpretation, only three states - Ohio, Indiana and Illinois - are not in recession.

In August, he measured Rhode Island and New Jersey as being in depression. This month he is adding Connecticut, New York, Masssachusetts, Vermont and Maine and, based upon final measurements, maybe New Hampshire and California.

This, he says, is what the people - household heads, consumers, voters -tell him.

End Adv PMs Thursday, Sept. 26

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