The Jan. 13 issue of Business Week contained the annual Industry Outlook package -- this year forecasts for the overall economy and 21 key industries. To discuss these outlooks, the Jan. 5 guests were economists Christopher Probyn and Russ Devlin of DRI/McGraw-Hill, which did the forecasting, and Michael D. McNamee, economics correspondent in BW's Washington bureau, who wrote the overview. Chris Probyn is director of U.S. and Canadian macroeconomic forecasting services for DRI.
OnlineHost: Copyright 1997 America Online, Inc.
OnlineHost: Material entered into AOL by persons other than those identified as Business Week's employees or authorized representatives, acting on behalf of Business Week, is material for which Business Week assumes no responsibility.
OnlineHost: Welcome to Business Week Online! Tonight we talk about the 1997 outlook for U.S. industry -- keyed to forecasts for 21 industries in the latest BW. Our guests: economists Christopher Probyn (CPROBYN) and Russ Devlin (RussDevlin) of DRI/McGraw-Hill, which did the industry forecasts, and Michael D. McNamee (MikMcNamBW), BW economics correspondent in Washington, who wrote the outlook overview.
JackBW: Good evening to all of you out there on AOL. I'm Jack Dierdorff of BW Online, your moderator tonight. Welcome, Chris Probyn and Russ Devlin of DRI/McGraw-Hill. Thanks for joining us.
CPROBYN: Thanks for inviting us.
JackBW: Mike McNamee may be caught in AOL's prime-time gridlock -- hope he makes it soon. Meanwhile, Chris and Russ, here's an opening question to set the framework before we get down to industry specifics.
Question: How do you see the economy overall for '97? What's your forecast for the growth rate?
CPROBYN: We see a 2.25% economy, with growth and inflation (as measured by a broad-based GDP deflator) increasing at that rate. The CPI will increase a little faster, but still be under 3%. And industrial production -- which is dominated by manufacturing -- will grow by about 2.5%.
JackBW: To go to one other crucial number, what do you forecast for unemployment?
CPROBYN: Unemployment should remain near current levels throughout 1997. The current level is about 5.4%.
JackBW: KNewman129 of Virginia Beach, Va., popped this question before we began.
Question: What is the outlook for international trade?
CPROBYN: Exports (after adjusting for inflation) should grow about 5.5% -- the same as 1996 -- while imports will grow slightly faster at 7.2%, up from 6.7% in 1996.
JackBW: Now, from Milwaukie, Ore., RS6430 has a wage question.
Question: I live in Oregon, and the minimum wage is going up to $5.50 this year, eventually to $6.50 in the next three years. I work in fast food and was wondering what might happen to living standards of lower-income people. Example: Will the wage increase actually help?
CPROBYN: Yes. The minimum-wage increase will help, but the trend is still toward a more disparate income distribution, with the top 20% of households taking an increasing share of total income.
JackBW: Moving now to the wide industry spectrum, thanks to a question from DotEve.
Question: Would you please tell me what industries you think will do well in '97? I am a new stock investor.
RussDevlin: Business Week's outlook suggests that agriculture, autos, aviation, software, and business services will have solid years. In terms of real output growth in DRI's forecast, computers will lead all industries, but will suffer much slower growth than they've seen in the first half of the 1990s.
JackBW: Viamazzini in northern Virginia says she's a loan officer, which explains this question.
Question: Do you think interest rates will go up or down?
CPROBYN: We believe that the next move in interest rates will be up, with the key short-term interest rate -- the federal funds rate -- rising to 5.75% by the end of 1997. However, this is a position which we hold with somewhat less certainty than we did last July, when we anticipated rate increases in the second half of 1996. Bond yields are expected to remain at or close to current levels through the year.
JackBW: We can't answer Iorillo (from California) about AOL specifically, but what do your forecasts say about high-tech sectors such as online services, the Net, etc.?
Question: Can you give us some insight to AOL for '97?
RussDevlin: The Web craze will certainly fuel a lot of investment in software over the next year, though it's been a tough business to actually make a large profit on so far. There are isolated cases of success, such as Amazon Books, but most people who are trying to make money by being on the Web are still losing money. It's a tough industry to get a handle on because government statistics don't go into that level of detail.
JackBW: You forecasted the financial sector, and MARKGO9851's question has a big influence there.
Question: Where do you see the Dow going in '97?
CPROBYN: While I do not have a specific answer for the Dow, as this is not a variable that we forecast, I expect the stock market to have another good year, as the amount of money seeking refuge in financial assets of all kinds continues to grow. I expect that the tone for the market will be set in the first quarter of the year, when the market might go up by as much as 3.5%. That's the S&P 500.
JackBW: As I recall from two weeks ago, Bill Wolman expects moderate but not flamboyant increases. You can check his transcript from 12/22/96 here in BW Online. Meantime, guys, still in finance, what do you see for banks and brokerages?
RussDevlin: Banks turned in good profits in 1996, and will likely do so again in 1997. However, their share of overall assets has been declining for quite some time, as brokerages, mutual funds, and other financial entities gather up a larger share of overall savings. Securities, held back by a less boisterous market, will likely not grow as fast as in 1996, but will post another solid year.
JackBW: JDTCMT in Reston, Va., is up next.
Question: What is the outlook for heavy industries, specifically steel, during the coming year?
CPROBYN: Output looks fairly flat, though at high levels. The issue is prices, which are threatened by a glut of imports. Autos and other key markets will be flat during the coming year, as the business investment cycle slows.
JackBW: Welcome, Mike McNamee from BW's Washington bureau, joining economists Chris Probyn and Russ Devlin of DRI/McGraw-Hill to discuss the industry outlook for '97.
MikMcNamBW: Hi, Jack, Chris, Russ, and folks.
JackBW: Mike, maybe you can chime in with comments on the role of government in the economy this year.
MikMcNamBW: Will do. It looks like a fairly simple year for policy on two fronts -- monetary and regulatory. The Fed will have a couple of minor rate hikes, but should be happy with the steady-as-she-goes economy. Regulatory reform will be on the GOP's wish list, but it's not likely to get very far. The budget battle, and any tax cut that Congress can pass, remains the big unknown.
JackBW: MikeMerc in New Jersey takes us back to the auto industry.
Question: In autos, do you think Chrysler can keep padding its growth, and can Detroit in general keep Japan at bay?
CPROBYN: Retail sales of new passenger cars should average 8.3 million units in 1997, down slightly from 8.6 million in 1996. Of this, 7.1 million will be produced domestically, and just 1.2 million will be imported -- down from 2.4 million units as recently as 1990. Light trucks will continue to do well -- which augurs well for Chrysler -- remaining at 6.5 million units in 1997, up from just 4.5 million in 1990.
MikMcNamBW: Chris, I'm surprised by the import forecast, in light of the strong dollar.
CPROBYN: More and more auto manufacturers have stopped exporting autos to the U.S. and have exported capital to build the cars in this country -- hence the quite rapid decline of imports in the 1990s.
JackBW: Mr Ken 3 has a question that Chris and Russ of DRI already pretty much answered (2.25% growth this year), but Mike, what did your reporting and analysis show on this?
Question: Are there signs of a downturn/recession in the near term?
MikMcNamBW: There are almost no signs of anything that could produce a recession in 1997-- or '98. It's quite remarkable -- a number of forecasters tell me that they have to torture their computer models to produce a recession, and even then it won't arrive until '99. The imbalances just aren't there.
CPROBYN: We would probably assign only a 10% probability to a 1997 recession.
JackBW: MORGWINT has a follow-up on the interest-rate question.
Question: If you see the economy essentially remaining much as it was in '96, why do you see interest rates rising?
CPROBYN: Although 2.25% doesn't seem like much, it does correspond to the "speed limit" of the U.S. economy, which is already operating at a very high level of activity, as witnessed by the low unemployment rate. Even at current levels, the unemployment rate concerns many economists, as they believe it is consistent with an acceleration of inflation. So, to prevent any further decline in the unemployment rate, the Fed will need to raise interest rates slightly.
JackBW: Just got an oil bill, so this question from Vince0207 in Port Ewen, N.Y. (across the river from where I am right now), is one I can identify with.
Question: Here in the Northeast, oil and gas prices are really hurting us. What do prices and inventories look like for '97?
CPROBYN: We expect oil prices to decline slightly through 1997, with the refiners' acquisition price of foreign crude falling below $19 [per bbl.] by the end of the year -- that's close to a $3 reduction.
JackBW: MrGooGoo in Brentwood, Tenn., goes shopping.
Question: What do you forecast for the retail sector next year, especially given the less-than-stellar fourth quarter? Are the big discounters going to continue to grow domestically, or will it all come from international growth?
RussDevlin: Retail sales should grow more slowly this year. The more interesting question is who is going to be doing the selling -- there are too many stores chasing that growth, and some losers are inevitable.
JackBW: JOHNINMD88 takes us to a sector we haven't touched yet tonight.
Question: What do you see for the housing industry in 1997? In particular, new home sales?
MikMcNamBW: We forecast a slight slowdown in home sales.
CPROBYN: Total new single-family home sales should average 680,000 in 1997, down from 750,000 in 1996. Existing sales will also fall slightly, to 4 million in 1997 from 4.1 million in 1996.
JackBW: Iceman1011 in Issaquah, Wash., sends up the next one. Mike?
Question: What sectors of the economy do you predict will have the most trouble in 1997?
MikMcNamBW: The biggest worry is still the consumer. Debt levels remain high, although DRI's numbers had the debt/income ratio dropping a bit as incomes grow. The closest thing to a recession scenario is this: A stock market correction scares consumers and squeezes their spending. That sets up conditions for a downturn, although it would take 18 to 24 months to develop.
RussDevlin: We see several investment-dependent sectors slowing in 1997, such as stone, clay, and glass (which includes cement and other infrastructure materials) and industrial machinery.
JackBW: On the other side of the coin, NVME345 in Washington state asks a question BW's Industry Outlook answers.
Question: What are your top five industries that will be hot in '97?
MikMcNamBW: Our leaders -- which are not exactly the list of fastest-growing -- are: agriculture, autos, aviation and defense, software, and business services.
JackBW: If not fastest-growing, what makes them leaders?
MikMcNamBW: I note that those are not just the fastest-growing -- they're the industries that have interesting stories to tell, or promise good profits. It's a somewhat subjective list.
CPROBYN: Commercial aircraft production is benefiting from airline orders, though the defense side of the business will still be weak.
JackBW: BBlack8181 in Louisville asks an appropriate question for this setting.
Question: I just got here...how about the computer industry for 1997?
RussDevlin: Computers will see growth rates in real output which any other industry would love -- around 20% -- but that's a lot slower than the industry is used to.
MikMcNamBW: That's an example of what makes it tough to put together a "leaders" list -- computers and chips are growing far faster than average, but it's a down year for them.
RussDevlin: Chip orders have been stronger in recent months, but the Christmas retailing season for computers wasn't at all encouraging, at least according to the reports of several key computer retailers.
JackBW: KNKOtter broadens the retail question to entertainment.
Question: The leisure groups were strong over the past several years, but really cooled in the last 12 to 24 months. Have retail and entertainment stocks hit the skids for a while?
MikMcNamBW: Our media/entertainment story was headlined "Reality Check!" It does look like tough times as the industry tries to digest the new technology and the wave of consolidation it's been through.
JackBW: Mike, here's a Washington question that doesn't bear directly on the economy -- but is vital to lots of workers.
Question: What do you predict we will be seeing as far as federally subsidized child-care programs, more recognition for child-care programs, etc.?
JackBW: It's from Rascalet.
MikMcNamBW: As the father of two, I'm sorry to say that doesn't appear to be on anyone's agenda for active consideration this year. The only help for parents that seems likely is a child tax credit -- both the GOP and Clinton have made proposals. It's likely to be part of the final budget deal.
JackBW: KNewman129 is back with a basic question about the economics of trade.
Question: When the dollar is stronger, how does it affect international trade?
MikMcNamBW: The strong dollar makes U.S. goods more expensive overseas and foreign goods cheaper here in the U.S. So it tends to increase our imports, decrease exports, and raise the trade deficit. However, as Chris and Russ point out, the nature of the global economy has been changing, as more companies invest worldwide to produce worldwide. So the effects can be masked. And, as always, the lags can be long.
JackBW: Jakitakua in San Francisco asks about an area the BW outlooks covered.
Question: How about biomedical industries for 1997? Good year?
MikMcNamBW: Pharmaceuticals are still struggling to come to terms with managed care, which holds down use of expensive drugs. More worrisome, our Rx expert, Joe Weber in Philly, reported that there aren't any blockbuster new treatments in the R&D pipeline. The outlook for biotech, however, was brighter.
JackBW: That's a wrap for tonight. Thanks for your answers, Chris Probyn and Russ Devlin of DRI/McGraw-Hill, and yours, too, Mike McNamee of BW -- you made up for lost time! We appreciate the flood of audience questions -- sorry we didn't have time for more, even going overtime.
CPROBYN: Glad to be here. Thanks for inviting us.
MikMcNamBW: Thanks to all who came.
JackBW: Transcripts of this and all BW Online conferences and chats are available soon after the event. Look under Talk & Conferences on the BW Online opening screen. And check the Industry Outlook issue in the BW Online area of AOL now. Thanks again, and goodnight to all!
Copyright 1997 by The McGraw-Hill Companies, Inc. All rights reserved.
