H20 Sunday, March 1,198'i
Last week we presented the view of a well-known economist who expects interest rates to rise to about 8 percent by midyear. A contrary view is offered by John Paulus, chief economist of Morgan Stanley & Co. Inc.</br></br>Paulus has believed that ÛÏonce the dollar stabilized in the foreign exchange market, the weak fundamentals in the economy would take over and begin to pull U.S. rates down.Û We have had stable exchange rates for the past 4 to 5 weeks and, as if on cue, long Treasury rates declined slightly last week</br></br>The Paulus forecast is for the yield on the long Treasury bond to fall to 6.50 percent by midyear (from the current 7.45 percent) and to stay at that level for the remainder of the year. He expects this to happen because he foresees economic growth, as measured by gross national product, to be 1 percent to 1.5 percent during the first half of 1987, and 2 percent for the entire year. ThatÛªs one-half to 1 point below the consensus view. Paulus also sees inflation at 3 percent to 3.5 percent versus the consensus of 3.5 percent to 4.5 percent.</br></br>Paulus points to the slowdown in the price growth in the services sector. Prices and wages have been growing 5 percent to 6 percent a year during the current economic expansion. Wage growth fell to 3 percent in 1986, and it is anticipated that this slowdown will be passed through in the form of slower price growth in the services sector in 1987.</br></br>The next factor has to do with corporate restructuring. In a recent study, Paulus examined the ÛÏcompetitiveness problemÛ that began in the 1970s as import penetration increased substantially, long before the U.S. dollar strengthened to record levels in the early 1980s. Corporate restructuring refers to such practices as the closing of inefficient plants and the modernizing of others, the granting of wage concessions and the paring of "fatÛ from bloated corporate bureaucracies. Paulus points out that ÛÏan integral role in the overall restructuring process is financial restructuringÛÓmergers, acquisitions and leveraged buyoutsÛÓwhich facilitates transfers of ownership and, ultimately, changes in management and work practices."