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ECONOMY TO ACCELERATE; INTEREST RATE HEADED HIGHER

 NEW YORK, Oct. 12 /PRNewswire/ -- "Conditions are in place for an acceleration in business activity, especially in industrial production and housing construction. Indeed, a brief period of surge is possible, says Eugene J. Sherman, director of research of M. A. Schapiro & Co., Inc., in the bank stock specialist firm's latest issue of "The Bank Stock Quarterly."
 "Retail sales are doing reasonably well according to a number of reports, especially department and chain store sales. Auto and truck sales are also doing well and, according to anecdotal reports, could be stronger if the dealers had more inventory. Housing sales are on a strong, steady uptrend, though with considerable month-to-month variation.
 "Yet, in the face of all of this final demand," says Mr. Sherman, "business inventories, in general, and motor vehicles and new and existing homes for sale in particular, are at minimal levels. And, based on the latest employment data, businesses are not showing signs of accelerating output. The problem seems to be business confidence. A recent quarterly survey of business expectations showed a quarter-to- quarter decline at continuing low levels. It would appear, therefore, that American producers are forfeiting business sales opportunities to foreign producers owning to American producers' low confidence and obvious caution.
 "Unlike consumers who seem to be buying, spending and borrowing despite reported low confidence, business decision makers seem to be acting on their negative views, shrinking, eliminating jobs, delaying investment programs and holding down inventories. But there is accumulating evidence that they are missing out on sales and growth. Import figures lag by over six weeks. But the guess here is that they will show another large increase simply because consumers, who are buying, will turn to foreign-produced goods in the absence of American product."
 The economist went on to say, "We think conditions will change soon and, perhaps, abruptly. We believe that there are still enough entrepreneurial juices flowing in the American body economic to induce action when opportunity presents.
 Autos And Housing Should Lead The Way
 "Accordingly, we anticipate a prompt upturn in housing construction and auto production, the industries with the lowest inventories relative to sustained sales. Construction and auto production are two of the highest paying industries in the U.S. economy. Both industries have powerful multipliers since they draw on a large amount and wide variety of raw materials and component parts. And, in the case of housing, new units are typically filled with appliances and furnishings. The echo effects will reverberate in other industries and in bank lending. There will be needs for trade credit, inventory finance, payroll finance, etc.
 "That raises another interesting point. For the eight quarters ending December 1992, internal cash flow at American non-farm, non-financial corporate business exceeded cash needs. That situation reversed in 1993. In the first quarter, cash needs exceeded cash flows, but corporations met those incremental needs by simply drawing down liquid assets. In the second quarter, corporate business turned to external sources of funds to meet their cash needs -- corporate bonds, commercial paper and bank loans. Looking ahead, we anticipate increasing reliance on bank loans, especially if the financial needs are as described above -- trade credit and inventory financing.
 Higher Short and Intermediate Term Rates Ahead
 "In that event, we would expect an increase in short and intermediate term interest rates, even assuming stable monetary policy. markets move most when surprised. Probably the biggest surprise at this stage would be a sudden spurt in business activity. As stated above, conditions for such a spurt are in place.
 "If such were to occur, we think that the Federal Reserve would tighten, not to abort the renewed economic vigor, but to return real short term interest rates to a positive level. Presently, the Fed perceives real interest rates as being around zero. Furthermore, adjusted reserves and M-1 have been growing at double-digit rates for over a year. In the event of an economic spurt, that amount of infused liquidity could have inflationary consequences.
 "In summary," Sherman said, "despite the bland employment data for September, we continue to anticipate an acceleration in economic activity, renewed credit demands, modest tightening by the Federal Reserve and higher short and intermediate interest rates, all in the fourth quarter."
 M.A. Schapiro & Co., Inc., founded in 1939, is an investment banking firm specializing in banks and maintains active markets in the shares of many of the country's top banking institutions.
 -0- 10/12/93
 /NOTE TO EDITORS: Mr. Sherman is available for interview. Call 212-530-7580. Copies of "The Bank Stock Quarterly" are available by telephone or facsimile./
 /CONTACT: Eugene J. Sherman, senior vice president, director of research of M. A. Schapiro & Co. Inc., 212-530-7580/


CO: M. A. Schapiro & Co. Inc. ST: New York IN: FIN SU:

TM-OT -- NYFNS3 -- 0899 10/12/93 07:32 EDT
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Publication:PR Newswire
Date:Oct 12, 1993
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