THE ECONOMY JUST WON'T STOP HUMMINGForget gyrating markets. From steel to pizza, execs see strong growth
The folks at CompUSA Inc. are jubilant. Buoyed by a wave of new buyers attracted by the latest inexpensive personal computers, sales and profits at the Dallas-based computer superstore chain are soaring. ''Damn the torpedoes,'' says CEO James F. Halpin. ''We think the economy is in pretty good shape, and we're pretty bullish about the fall.''
So are a lot of other companies. Foreign currency markets are gyrating, and the U.S. stock market is causing investor whiplash. The Dow Jones industrial average bounced back from a 7.7% slide in August with a record 257-point rebound on the first trading day of September. But what's unmistakable is the vibrancy evident across the economy, according to interviews with business executives around the U.S. From computers to steel to hotels to pizza, almost every industry sees strong demand continuing to the end of the year--and maybe further.
''I think we ought to have a really nice economy'' for at least the next two years, says Gordon M. Bethune, chief executive of Continental Airlines Inc. His optimism has soared with the record loads of vacationers and business travelers that Continental flew this summer. Adds George Dalton, chief executive of Fiserv Inc., a Brookfield (Wis.) data processing company: ''There is a tremendous amount of opportunity out there.''
LEAN, NOT MEAN. Companies are seizing the day. Orders for nondefense capital goods rose at a 12% annual rate over the three months ended in July, as businesses invested to add new capacity and boost productivity. A new survey by Manpower Inc., the temporary help agency, finds 28% of companies planning to add staff in the fourth quarter, the strongest yearend since 1978. Consumer confidence rose sharply in August, foreshadowing a continuation of the July surge in consumer spending. The purchasing managers' index for August was down a bit as factories worked off inventories. But it still shows moderate growth in the manufacturing sector.
Moreover, there are no immediate signs of inflation igniting, despite continuing strong growth. On Aug. 28, the Commerce Dept. revised second-quarter growth figures upward from 2.2% to a strong 3.6% annual rate. But prices rose at only a 1.5% rate. And while wages are up, that pressure has been offset by flat health-care costs and productivity gains. ''We've increased wages about 3% and funded it with an increase in efficiency,'' says Myron C. Noble, chief executive of PiROD Inc., a Plymouth (Ind.) maker of TV, radio, and cellular towers. So, even though the Federal Reserve had anticipated a slowdown in the second half when it held interest rates stable this spring and summer, the central bank is unlikely to raise rates now (page 37).
That leaves the way clear for the U.S. economy to continue its remarkable surge. And as it has for the past four years, the high-tech sector is leading the way. Personal computer demand is running 21% ahead of last year's levels. That's due in part to the sudden popularity of new PCs that sell for less than $1,000. Almost overnight, they have grabbed more than 20% of the market, says Matthew Sargent, a PC analyst with market researcher Computer Intelligence. ''It's a new market that wasn't there before,'' he says.
Then there's communications. Sales of networking gear such as routers and switches are way up over last year. Regional telephone giant SBC Communications Inc., which covers the Southwest and California, says it's adding new residential access lines at a 14.5% annual rate.
The ''old'' manufacturing economy is also alive and kicking. Acme Die Casting Corp. in Racine, Wis., just received a new contract from Chrysler Corp. for engine parts. ''We're estimating a good 20% to 25% increase [in revenues] from last year's fourth quarter,'' says Richard J. Dovorany, chairman and president of Acme, which supplies aluminum and zinc-alloy die castings. Steel companies booked new orders in July that should keep them running flat out. ''The steel industry is very good right now,'' says John Correnti, chief executive of Nucor Corp. General Motors Corp., a huge steel consumer, reported a 7%-plus jump in sales of cars and light trucks in August, beating expectations.
HELP WANTED. One indicator of how bullish manufacturers are feeling is their packaging orders. ''We see our customers launching many new products,'' says Andrew T. Berlin, CEO of Berlin Packaging Corp., a 99-year-old Chicago-based supplier of containers for food, pharmaceutical, and cosmetic companies.
Growth is lifting small businesses too. ''We expect increased sales, since there is more disposable cash out there,'' says Norman Mallett, chief financial officer of Bertucci's Inc., an 80-store gourmet-pizza chain based in Wakefield, Mass. Bertucci's plans to open some 15 new stores over the next 18 months. Its biggest hurdle: hiring the personnel to staff them.
To find workers in the tight New England market, Bertucci's has taken to printing help-wanted ads on checks at some restaurants. It also added a 401(k) plan and new performance incentives for store managers. At CompUSA, a shortage of computer technicians and training instructors could crimp sales, so the chain now ''pays a little bit above the market,'' says Chief Operating Officer Harold F. Compton.
Those wage hikes would usually be a sure sign of inflation to come. But employers have had a pleasant surprise. Despite fears that runaway medical inflation was going to make a reappearance this year, the price of medical care rose at only a 2.1% rate over the last three months, the slowest pace since 1972. ''Health-care costs are remaining fairly stable--an improvement over the double-digit increases of prior years,'' notes Acme's Dovorany.
Not every corner of the economy is thriving. ''The consumer electronics industry is still waiting for the great economic prosperity to come our way,'' says Robert A. Gunst, CEO of Good Guys Inc., an electronics chain based in Brisbane, Calif. Its same-store sales declined 3% in the most recent quarter. And the two-week strike by United Parcel Service Inc. also hit some businesses hard. Duck Duck Goose! Ltd., a retailer of children's clothing in Chicago's western suburbs, does its biggest business before schools open. But the UPS strike cut August inventories in half, sapping the company's sales. ''Many of my customers are early shoppers, and the goods weren't here when they were,'' says Catherine Donovan Wagner, owner of the three-store company.
What could slow down the overall economy? A downturn in the tech sector might. But that seems unlikely, given the continuing demand for computers and communications gear. External events could take the markets down--and put a drag on the U.S. economy. The rout of East Asian currencies, for example, could lead to economic weakness that crimps demand for U.S. exports.
A blow to consumer confidence--which could be induced by a sharp drop in the U.S. stock market--would also ripple quickly through the American economy. ''Consumer confidence is vital to keeping things under way,'' says Alan R. Hirsig, CEO of ARCO Chemical Co. ''All chemicals end up as plastics in cars or in a lot of consumer durables and nondurables.''
But given the grassroots strength of this upturn, even a market correction wouldn't slow growth much. Economists and traders may be scratching their heads over the internal workings of this economy, but the U.S. growth machine rolls on.
By Michael J. Mandel in New York, with Stephanie Anderson Forest in Dallas, A.T. Palmer in Chicago, and bureau reports
Updated Sept. 4, 1997 by bwwebmaster
Copyright 1997, Bloomberg L.P.