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BusinessWeek: January 11, 1993 |
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Industry Outlook: Introduction
THIS REBOUND JUST MAY BE FOR REAL This momentum should carry into 1993. Interest rates are still at 20-year lows, putting money into the pockets of both business and consumers. Companies are gearing up to boost plant and equipment spending. And the incoming Clinton Administration seems likely to adopt a moderate fiscal stimulus package-perhaps in the form of an investment tax credit-which could give an extra kick to growth. Many forecasters now see the economy expanding at a 3% rate or more through most of 1993, with growth gradually strengthening toward the end of the year. That's not impressive compared with earlier recoveries. But it would be enough to push up operating profits by almost 20% this year, according to estimates by DRI/McGraw-Hill. And that should be enough to add new jobs to the economy, a welcome relief after three tough years. WILL IT LAST? There are those who remain skeptical, of course. Economists have predicted a recovery two or three times since the recession started in July, 1990, and many corporate executives aren't yet ready to embrace the latest good-news forecast. "We see our own order book strengthening," says Thomas C. Graham, chief executive officer and president of steelmaker Armco Inc. "But we saw the same thing last summer. Then it collapsed on us." And while Richard A. Clarke, chairman of Pacific Gas & Electric Co. in San Francisco, sees reason for optimism, he too is still worried. "I think the economy is improving, but I'm not sure it's sustainable," says Clarke. The recovery also doesn't yet feel real to many out-of-work Americans who see the unemployment rate stuck above 7%. Manufacturers bave eliminated 1.4 million jobs over the past 4 years, and most of those are not coming back soon. General Motors Corp. and IBM have just announced plans to chop tens of thousands more positions in 1993. Defense contractors are still shedding jobs. And economic weakness in Germany and Japan means that most exporters won't be hiring either. Even so, the recovery is finally developing enough oomph that it should overcome the drag of slow job growth. The biggest plus is low interest rates, which are finally working their magic on the balance sheets of businesses and consumers. Typically, interest rate declines take about 12 to 18 months to stimulate the economy. Sure enough, the big cut in rates that the Fed made in December, 1991, is only now having its full impact. And some impact it is. Nonfinancial businesses have been able to take advantage of the low rates to shed some $50 billion worth of debt, and refinance much of the rest. Corporate interest expenses have dropped by some $20 billion annually. Consumers have reduced their high-cost consumer installment credit by some $15 billion since the end of 1991, and refinanced home mortgage debt at low rates. And with inflation now running at only 3% annually, many economists expect long-term rates, now at 7.3%, to drop even further. NEW MARKETS. With less debt on their books and a lower cost of borrowing, companies should be ready to start spending on plant and equipment again. The latest Commerce Dept. survey of investment plans shows that capital spending, adjusted for inflation, could be up a healthy 7.6% in 1993. One company taking advantage of a reduced debt burden to boost investment is TW Services Inc., the largest Hardee's Foods Systems Inc. franchisee and the operator of Denny's Inc. and two other restaurant chains. Saddled with a mountain of debt from the late 1980s, TW has been able to cut its interest costs by refinancing at lower rates, and it has gotten a $300 million cash infusion from Kohlberg Kravis Roberts & Co. That's enabling it to boost the pace of its Denny's restaurant remodeling program and to add as many as 140 new Denny's and Hardee's restaurants this year as well. With the economy improving, businesses are also looking to expand into new markets. General Nutrition Inc., the Pittsburgh-based retailer of health and fitness items, plans to open 300 stores in 1993, according to CEO William E. Watts. He sees an opportunity to lower the costs of expansion by taking advantage of high vacancy rates at shopping centers throughout the country. "They're crying for tenants," says Watts. Capital spending plans in 1993 could be lifted even higher if Clinton gets Congress to enact an investment tax credit after he takes office. No matter how that comes down, job growth, though improved, could be anemic this year, and that will keep a lid on consumer spending. Cutbacks at giant corporations get most of the press, but the pressures of global competition are forcing companies all across the economy to slash labor costs and boost productivity. "Companies will be very slow to add workers," predicts Richard A. Zimmerman, chairman of Hershey Foods Corp. His company is now putting up plants that require about half the number of workers to run as did similar factories five years ago. TRADE DRAG. Manufacturing, in particular, faces two special problems that will hold job growth in factories to almost nothing in 1993, according to estimates from DRI/McGraw-Hill. For one, defense spending, adjusted for inflation, is expected to drop by 8% this year, on top of a 7% drop in 1992. That means a continuing erosion of jobs in aerospace, electronics, and other defense-related industries. And there's little chance of a big expansion in U.S. manufacturing exports in 1993. The U. S. has become the low-cost producer in many industries, such as paper and steel (page 72). But many big overseas markets, such as Europe and Japan, have turned sluggish. Germany, in particular, will grow a paltry 0.5% this year, according to forecasts by Merrill Lynch & Co. The investment company figures that Japan's growth rate will be only 1.6%. Instead, the recovery will be fueled by the service sector. Because domestic service companies are more insulated from foreign competition, it's easier for them to add workers and raise prices. A recent Dun & Bradstreet Corp. survey of business expectations shows that executives in service industries are more optimistic about sales, profits, and even employment. "Business-to-business services are beginning to pick up now that people are becoming confident in the recovery," says Joseph W. Duncan, chief economist of D&B. Indeed, employment is slowly starting to pick up across much of that two-thirds of the economy, from business services to wholesaling to many of the financial services. Computer and data-processing services alone bave added 29,000 jobs in the past 12 months, while securities and investment firms have taken on another 32,000 workers. Job growth, however modest, may be the long-awaited sign that the longest period of sluggish growth since World War II is finally coming to an end. Perhaps no one will celebrate in the streets. Still, the odds are good that by the end of 1993, even the skeptics will be willing to smile. | |
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