LOS ANGELES (Reuter) - The economy would not be hurt by a sharp decline in the stock market, a study by economists at the University of California Los Angeles said Wednesday.
In fact, the economists said a decline of more than 30 percent in the Dow Jones industrial average would probably stimulate the economy by pushing interest rates lower, boosting bond prices, and providing pension fund managers with an opportunity to acquire equities with better yields.
``A decent collapse in the stock market would be nice right now,'' the economists said in their study. ``We need a break for a change.''
The study said a 36 percent drop in the stock market, similar to the decline in the Aug. 25 to Oct. 19, 1987, period, would take the Dow industrials to 4,160 from about 6,500, more than twice the low hit in the October 1987 crash.
The quarterly study said the U.S. economy should grow around 2.5 percent next year, with no apparent threat of inflation. It said gross domestic product should continue to grow moderately next year and inflation should remain low, with consumer prices rising 2.8 percent in 1997. Producer prices are expected to rise only 1 percent in 1997.
The economists said the moderate rate of inflation was not expected to put pressure on the Federal Reserve to move aggressively on raising or lowering interest rates.
The central bank on Tuesday held rates steady, leaving the key federal funds rate that commerical banks charge each other for overnight loans at 5.25 percent and the discount rate that the Fed charges banks for money at 5.0 percent.
The UCLA study said corporate pretax profits were expected to grow about 6 percent next year, compared with 3 percent increase in 1996. However, that is still down from the 13 percent growth experienced in 1995.
Among other projections:
-- the growth rate for business fixed investment will remain at around 6.3 percent in 1997, about the same as in 1996, but down from 9.5 percent in 1995.
-- housing starts will average around 1.48 million units in 1997, almost the same as this year's level. Effective mortgage rates were expected to fall to 7.22 percent in 1997.
-- consumer spending for goods and services is expected to grow at 2.4 percent next year, and unemployment would fall to 5.2 percent and then perk up to 5.3 percent in 1998. The unemployment rate stood at 5.4 percent in November.