TIME: Almanac 1993/TIME Almanac 1993.iso/time/010791/0107200.000

Text File | 1992-08-28 | 8.3 KB | 179 lines

                                                                                BUSINESS, Page 69

Riding Out The Storm


The recession will stagger many industries, but some may do
fine. Here is a forecast of winners and losers.

By JOHN E. GALLAGHER -- With reporting by Jane Van Tassel/New
York


    Most American businesses have one thing in common right
now: a sinking feeling. The recession that apparently began in
late summer has drawn down the economy with wrenching swiftness.
For most U.S. companies, simply riding out the slump has become
the No. 1 short-term priority. But not all firms will be
affected in the same way. Such heavy industries as
petrochemicals and autos are likely to suffer the most, since
they make products that people can often postpone buying.
Heavily indebted companies will hurt too. But businesses that
produce such necessities as pharmaceuticals and food will hardly
feel the pinch. Here is a 1991 forecast for nine prominent
industries:


    Aerospace and Defense. Even a war will bring little help to
military contractors, because Pentagon spending will decline at
a brisk annual rate of 5%, after adjustment for inflation.
Companies that are heavily concentrated in military production,
notably Northrop, will be the hardest hit. Fighting in the
Persian Gulf may produce fresh orders for suppliers like General
Dynamics, which makes the Stinger antiaircraft missile, but any
increase would only be temporary. Because the Bush
Administration and Congress have delayed hard decisions on the
future of many programs, planning has become difficult for the
industry. "I think next year is going to continue that
uncertainty in the budget process. Confusion reigns," says Frank
Shrontz, chairman of Boeing. Producers of commercial jetliners
will have the smoothest flying. Boeing and McDonnell Douglas
have a hefty backlog of orders, many from foreign carriers,
which will help the companies weather the downdraft.

    Autos. The best hope for domestic carmakers is that sales,
which have been sliding since 1986, will match last year's level
of 14 million vehicles. By temporarily idling 38 plants during
the first quarter of 1991, the Big Three aim to avoid a huge
buildup of unsold cars. "We started a massive cost-reduction
program in 1989, and all of us have slowed down our production
schedules," says Robert Miller, vice chairman of Chrysler. "We
all now have the staying power to get through a recession." With
losses of $214 million in the third quarter alone, Chrysler is
the most vulnerable of the Big Three. All the firms have their
attention focused on Washington, where Congress may reconsider
legislation that would raise fuel-economy levels 40% by 2001.
Detroit is worried that such a law would require a major
investment, which the automakers can ill afford at the moment.

    Computers. Stagnant sales and customer demands for better
service made the past year a tough one for the industry, with
many companies cutting their budget and work force. The coming
year will bring more of the same, with some bright spots.
Overall, sales will be weak as cost-conscious executives curb
spending on new equipment. One stronger area will be
lower-priced products, including portable computers and
software. The biggest variable will be exports, which account
for as much as one-half of all sales. This overseas business
could improve if the dollar remains weak. "To a large degree,
that is what's going to determine the rebound that will occur,"
says Laura Conigliaro, an analyst for Prudential Bache Research.
Such companies as Wang and Control Data, which rely on older
technology, may be among the biggest losers. A likely winner is
IBM, which has an impressive new line of products.

    Health Care. Health care, the most recession-proof of any
industry, will keep growing about 10% in revenues during 1991,
generating thousands of new jobs. "Americans are willing to
support any capacity out there, but at some point that will
crumble," says Uwe Reinhardt, an economist at Princeton
University. Most employers have begun to balk at rising
health-insurance premiums, and this could begin to restrict the
growth of some parts of the industry. Psychiatric care may feel
the pressure first, as employers seek limits to insurance
coverage. Pharmaceutical companies, notably Merck and
Bristol-Myers Squibb, will be big moneymakers again in 1991.
Most of the major companies have invested heavily in new drugs
that will pay off early in the decade.

    Insurance. The industry will have to fight a rising public
perception that insurers are on the brink of a debacle
comparable to the thrift industry's. In fact, most insurance
companies are far healthier than savings and loans. "Total
assets of the industry are on the order of $2 trillion. Very
little of our holdings are below investment grade," says Robert
Winters, chairman of Prudential. However, a few firms are
faltering because of large junk-bond portfolios. And far more
companies, notably Travelers and Equitable, have suffered from
the falling value of real estate holdings. This year insurance
companies will be caught in a squeeze because liabilities will
go up but consumers and regulators will resist any sizable
increase in premiums.

    Newspapers. The most immediate worry in the industry is the
precipitous drop in advertising. "It's the softest ad
environment we've seen in over 20 years," says Douglas
McCorkindale, chief financial officer of Gannett, the largest
U.S. newspaper group. Ad linage will probably keep falling
through 1991, largely because troubled retailers have cut back
drastically. At the same time, the price of newsprint, which
accounts for about 25% of a paper's expenses, has been rising
because of higher production costs. Forced to economize,
newspapers will continue to trim their staffs and, by extension,
their news coverage. When ad revenues pick up, papers will still
have an enormous problem to solve: a sharp decline in interest
among readers under 30.

    Oil. The outlook hinges on the Persian Gulf crisis. A
protracted war could raise oil to $50 per bbl. or more and bring
huge profits to many companies. But in a standoff, crude will
probably remain at about $25 per bbl., or $5 to $10 above last
summer's price. That still means a substantial profit for most
oil companies, even though higher prices at the pump will cut
demand for gasoline 1% to 2%. To diversify reserves, the
industry will expand its overseas search for new supplies. But
the industry's main concern will be found closer to home. "You
can't look at 1991 without looking at the environment. It's a
pervasive issue," says James Kinnear, Texaco's chief executive.
To meet standards set by the Clean Air Act, the companies will
have to spend billions of dollars to formulate cleaner-burning
products. That cost will eventually be passed on to the
consumer.

    Retailing. Until the second half of this year, stores will
not see much improvement over their dismal performance in 1990,
when profits fell about 5%. The upswing may be too late or too
modest to save some of the more debt-ridden retailers from
severe hardship. Among the most troubled: Carter Hawley Hale and
Federated, which owns Bloomingdale's and Burdine's. Stores that
survive the shake-out will compete strenuously by offering
improved services to increasingly fickle and demanding
consumers. "They want retailers to make it easier for them to
buy. Those who can fulfill that will do well," says Kenneth
Macke, chief executive of Minneapolis-based Dayton Hudson. Among
those who should succeed: discount chains, including K mart and
Wal-Mart, and such specialty stores as the Gap and Victoria's
Secret.

    Wall Street. Investment firms hope they have reached the
end of their belt tightening, which began with the 1987 crash
and led to more than 50,000 layoffs. "We look for the start of
a rather long and sustained bull market beginning the third
quarter," says William Schreyer, chairman of Merrill Lynch. The
industry also wants the government to offer some savings
incentives -- for example, IRAs with better tax benefits -- to
overcome the nation's low savings rate (4%, vs. 17% for Japan).
That may encourage consumers to invest more, which could help
rebuild not only Wall Street but the rest of the U.S. as well.