Poll Finds Firms Feeling Squeeze of Fed’s Rate Hikes

A string of interest rate hikes is beginning to take a toll on some Southland companies.

In one of the first solid signs that the local economy may be slowing, a new survey in Orange County shows that higher interest rates and the volatile stock market are eating into profit margins and forcing some companies to scale back their expansion plans.

Predictably, finance, insurance and real estate firms have been hit hardest by the rate hikes, according to a poll released Tuesday by the UC Irvine Graduate School of Management. Indeed, about 80% of the executives queried in those industries said their firms are being squeezed by higher interest rates. Moreover, about a third of the executives in manufacturing and wholesale trade said they have curtailed expansion plans.

The survey was conducted in mid-June, about a month after the Federal Reserve Board’s last bump up in short-term rates. The poll results signal that the regional economy is beginning to lose speed, said Jack Kyser, chief economist for the Los Angeles County Economic Development Corp.

“I think everybody has been waiting for some type of evidence that the local economy is slowing down,” said Kyser, adding that the state and Southern California can expect weaker growth into 2001.

In Los Angeles County, the Economic Development agency’s field workers have noticed that more new business projects are being shelved, at least temporarily, Kyser said. Some smaller retailers, which also are staring at higher rents, are putting planned store openings on the back burner.

R.D. Olson Construction, an Irvine builder of hotels and resorts, has received 20% to 25% fewer requests to bid on new projects, President Dennis Reyling said.

“We have the largest backlog in the history and certainly have enough to keep us busy for the next year,” Reyling said Tuesday. “But we’re a bit concerned beyond that.”

In the Riverside-San Bernardino area, purchasing managers also are less optimistic due to concerns over interest rates, said Barbara Sirotnik, who oversees a monthly survey of the Inland Empire’s manufacturing industry.

While the Inland Empire’s economy remains strong, managers are beginning to become concerned about the broader economy, said John Husing, an economist in San Bernardino. Some doubts “are beginning to creep into their thinking, and it’s the first time I’ve felt that in a long time,” he said.

At Alvarado Manufacturing Co. in Chino, the rate hikes are causing customers to delay scheduled construction projects and related purchases, said purchasing manager Roger Brott.

“We haven’t seen a slowdown of this magnitude in a decade,” he said. If the trend continues, he said, the company, which makes bar railings for restaurants and turnstiles for supermarkets, might have to lay off some of its 50 workers.

The Orange County survey, conducted by telephone between June 15 and June 21, was a follow-up to a UCI poll in January and February, when executives expressed more confidence. In the latest survey, researchers interviewed 100 executives, asking them to assess the impact of the stock market fluctuations and the Fed’s move to increase interest rates by a full percentage point between February and May.

Based on responses to the earlier survey, “this was to have been a banner year for business expansion in Orange County,” said Dennis Aigner, survey director and professor of economics at the Graduate School of Management. Now, he said, executives are reevaluating and becoming more cautious.

The Fed has raised the federal fund rate six times since last summer. The latest hike bumped the key rate that banks charge each other for overnight loans to 6.5%. The Fed is trying to slow growth gently and curb inflationary pressures without prompting a recession. Many economists now think that it is accomplishing that goal.

While interest rates have become the largest economic drag, the gyrating stock market also has hurt business. UCI’s June poll, for example, found that more than four out of 10 executives in finance, insurance and real estate have been affected by the market’s swings. The retail sector was the second-hardest hit by the fluctuations, where 36% of the executives reported an impact.

In response, companies have been rethinking plans to issue initial public offerings, provide stock options for employees and expand operations, the survey found.

Deloitte & Touche’s Southland offices have felt the pinch. A number of the accounting firm’s clients have delayed or scrapped plans for stock offerings, said Bob Grant, managing partner of the Costa Mesa office.

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Staff writer Marc Ballon contributed to this report.