Robust economy would survive small rate increase, experts say.

The economic recovery here is going so strong, and the economy has diversified so much, that a small rise in interest rates probably would do little to dampen things, according to local economists.

The expectation is that Federal Reserve Chairman Alan Greenspan will not hike interest rates at the board's meeting on Aug. 20. But many speculated that interest rates could rise in September, despite this being an election year, because inflationary growth may have to be curtailed.

The companies that normally suffer the most when interest rates inch upward are manufacturers, which use lots of equipment and need to buy real estate for additional space. Fortunately for Southern California, its economy is no longer as dependent on manufacturing as it was in the 1980s.

"As it became more diversified and more of a service industry area, then the impact of higher interest rates has had a lesser effect," said Leonard Weil, a finance professor at UCLA's Anderson School of Management.

This diversification also has contributed to a long-awaited economic growth spurt.

"The economy is beginning to hum and is doing better than the rest of the nation. We're seeing more aggressive borrowing here than in other places," said David Stewart, chairman of the marketing department at the University of Southern California.

One of those growth areas is international trade, where businesses aren't bashful about borrowing money to move inventory.

But a few industries still weak from the recession would have to make smart financial decisions to weather a hike in interest rates, economists cautioned.

"Retailing is one of those areas," said Stewart. "It still hasn't picked up. And certainly folks in the health care arena are still struggling with cost pressures."

Economists said most Southern California businesses are doing well enough now that they aren't too worried about a small increase in rates.

"Companies are not rushing out to borrow, and that is a good indication that there is not too much concern (about) rising rates," said Weil of UCLA.

At Bank of America, commercial loan demand is higher this year than last year.

"I don't think most people perceive enough of an uptick to be concerned," said Jim Deane, Bank of America's senior vice president for the Los Angeles Regional Commercial Banking Office. "But what we have seen in the last three to six months is our permanent borrowers, such as companies that are permanently in debt, are shifting some of their floating-rate debt to fixed-rate debt."

Bank of America economists predict that the Federal Reserve will tighten its monetary policy during the second half of this year, pushing up the federal funds rate between one-quarter to one percentage point. This would help slow inflation from about 2.9 percent this year to an estimated 2.1 percent in 1997.

But commercial lenders are optimistic that a rise in interest rates would not pose a threat to Southern California's economy.

"The idea is that the Fed taps on the brakes, and that reassures the financial market that the economy is under control," said Jack Kyser, chief economist of the Los Angeles County Economic Development Corp.

Kyser said he expects the prime rate, now at 8.25 percent, to end up at 8.75 percent by the end of the year, then decline during 1997.

"It is like you are flying a plane and making subtle adjustments in your course and altitude to assure the smoothest ride," he said.

Some economists believe there will be no rise in interest rates because the economy is already showing signs of weakness, and inflation will not be as high as expected.

"Even if the Fed did increase interest rates, it would only be a quarter to a half a percent in short-term rates. I don't think businesses or homeowners are sensitive to that kind of increase," said Esmael Adibi, director of the Center of Economic Research at Chapman University in Orange County. "I think the general state of the economy is more important to businesses than the interest rate."

Nevertheless, everyone agreed on one thing - Southern California's economic outlook is brighter than it has been in the past five to six years, and it will continue to outpace the rest of the nation, whether there is a rise in interest rates or not.

"The worst is definitely over," concluded Michael Carney, professor of finance and real estate at California State Polytechnic University, Pomona.