KENTUCKY REPORT

erecudve vlce precldent

by Don A. Campbell

lfIfINX I have finally found out the Ireasons that interest rates continue to stay up, but knowing the reasons hasn't given me any magic wand that will let me do anything about it. But for whatever it's worth, after countless hours of reading, this is about the way it stands:

The combination of a money supply rising at 690 and an economy declining at a rate of almost 490 in the frrst quarter should have produced a sharp drop in interest rates. To the dismay of the administration and economic forecasters, rates have not fallen. The evidence is mounting that the main culprit is an unprecedented demand by business for short term funds. Unfortunately this short term borrowing continues at a high rate and strongly suggests that the trend will not be reversed easily and that interest rates will not weaken substantially in the coming months.

While many economists concede that they are puzzled by the surge in demand for short term loans, three major factors appear to be responsible:

(1) Disinflation. In the past, corporations borrowed as a defense against steadily rising prices. It seemed wise because they thought they could pay off in depreciated dollars. Itjust didn't work that way.

(2) No long term loans. Recently corporations have been borrowing short term, not only to hnance operating expenses, but also increasinglyto bank roll long term projects. This reflects their inability to borrow in the bond markets, which have been effectively closed to all but the financially healthiest companies. As a result, many companies are unable to borrow because their ratings have been lowered as the recession has cut deep€r into sales and profits.

(3) Cash flow. Corporate profits have taken a worse beating in this recession than in the '74-'75 slump, the most severe in the post war period. The slump in profits, along with a sharp rise in the accounts receivable, as more and more companies are unable to pay their bills on time, means that corporate cash flow is severely squeezed. This, in turn, is forcing more and more companies to borrow short term money just to stay afloat.

If the recovery occurs in the second

(3) Profit comparison between most recently completed year and business year before.

Profits up l09o or more-lE firms14.8olo

Profits up l-1090{ lrms-590

Profits even-16 firms-I3.1 9o

Profits down l-1090-36 firms29.5o/o

Profits down lG259o-26 firms21.30/o

Profits down 2590 or more-20 firms - 16.490

(4) Profits in black vs. red.

Operated at a profit-Ifi) firms82Vo

Operated at a loss-22 frms-lE9o

Note: Well over half that indicated a profit noted just barely.

(5) Attitude toward current y€ru.

Optimistic-34 frms-27 .99o

Remain Even-44 firms-36.1 9r

Decreased Volume- I 8 firms14.89o

Pessimistic-Zi firms-2 I 3 9o half as many forscasters cf,poct, some pressure will bc taken off the short tenn markets as profits and cash flow improve. The real danger is thar the rebound may be delayed and, if that happens, we may flrnd somahing much worscthan what we have at the present.

BMMA's 1982 summer m:rnagement conference will be held June 27-29 at the Holiday lnn located on the grounds of the World's Fair at Knoxville, Tn.

Several revisions were made in the tartable of the Kentucky unernplolment insurance by the 'E2 Gcneral Asscmbly which will affect you as an employer. The taxable wage base was changed from $5,0fi) per employe to $E,m, rctroactive to January I, 1982. The statcments were delayed so the new date was extended to May 17. The maximum weekly bnefit was frozen at its prescnt level. A copy of this law will be available after JuIy lst.

The teamster's union has proposed that Reagan back changes in the '74 Employee Rciremcnt Sccurity Act so that teamsters and oth€r funds can lend money for home mortgages at below market rates. This would be a breakthrough for the housing industry and could take the place of government subsidized funds.

I like this: Behind wery enterprise stands the man who is ultimately responsible. The eager and able men on his staff spin golden dreams and proposc new plans. They fra while he ponders. But to him deliberation is sweet. He knows that sucaess will have many shareholders but that failure will be the sole property ofthe man responsible.