TIME: Almanac 1993/TIME Almanac 1993.iso/time/caps/85/85capeco.1

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                                                                                January 6, 1986

ECONOMY & BUSINESS

The Year of Big Splashes


Scandals and scares, booms and busts made 1985 a period of
tumult


The economy during 1985 carried U.S. business ahead at the
sleepy pace of Ol' Man River. Rolling along at a modest 2.4%
rate, it provided most companies with just enough propulsion to
make for a comfortable ride. But if the economic mainstream was
smooth, the trip for many voyagers was as hair-raising as a
Snake River rafting expedition. In 1985 a parade of slumps,
scandals, panics and just plain goofs rocked the business world.
All the while, an unprecedented wave of acquisitions was
swallowing up such well-known corporate names as ABC, RCA,
Nabisco, General Foods and Revlon.

Halfway through 1985, the nearly three-year-old economic
recovery seemed about to end. Second quarter growth in the
gross national product was a slow 1.1%, compared with 3.7% in
the previous period. But the low level of inflation, about 3.5%
for the year, enabled the Federal Reserve Board to ease up on
interest rates. "The Fed is riding to the rescue," Economist
Walter Heller said in May. As a result, more credit began
flowing to businesses. Between April and July, the prime rate
fell by a point, to 9 1/2%, where it ended the year.

The economy began to pick up in the latter half of 1985, buoyed
by heavy consumer spending. Outstanding installment credit
jumped 15%, to a record $530 billion. Shopper confidence was
partly the result of good news in the job market. Unemployment
inched downward from 7.3% in January to 7% in November.

Even as the economy quickened, though, a major problem was
looming offshore:  a $145 billion U.S. trade deficit. The prime
cause for the yawning gap between exports and imports was the
strong U.S. dollar. American businesses found it increasingly
difficult to compete in foreign markets because their wares were
too expensive. At the same time, low-priced imports pummeled
U.S. industries at home. The trade imbalance held back the
economy and raised protectionist fervor to a level not seen
since the Great Depression. More than 200 anti-import bills
surfaced in Congress, including measures to keep out shoes and
textiles. "The protectionist pot is about to boil over," Senate
Majority Leader Robert Dole proclaimed on a trip to Japan in
August. "I have never seen stronger congressional sentiment for
acting on the trade front."

Japan came under intense criticism for flooding the U.S. with
its products while blocking imports. Said Pennsylvania Senator
John Heinz:  "We need to retaliate against Japan. They deserve
it." Sensing a trade war brewing, Prime Minister Yasuhiro
Nakasone appeared on Japanese television in April to ask his
countrymen for help. Said he:  "If each Japanese buys $100 in
foreign goods, the increase in imports from that would amount
to $12 billion, and foreign countries would be happy."

After denouncing import quotas as "ineffective and extremely
expensive," President Reagan pledged in September to create a
$300 million war chest to help U.S. companies finance exports.
Treasury Secretary James Baker met with finance ministers and
central bankers from Japan, Britain, France and West Germany at
New York City's Plaza Hotel and agreed to help bring down the
runaway dollar. Prodded by Government intervention in
foreign-currency markets, the dollar by December had declined
19% from its peak in February.

In heading off the trade crisis, the Administration adopted a
new, take-charge stance in international economic affairs.
During the President's first five years in office, the U.S. had
followed the hands-off policy advocated by Treasury Secretary
Donald Regan, a fan of free-market solutions. But after White
House Chief of Staff Baker swapped jobs with Regan in February,
the Administration began taking a more active role. Less than
a month after the Plaza Hotel meeting, Baker unveiled yet
another ambitious blueprint for repairing the global economy,
this time a plan to defuse the Third World debt bomb. Baker
contended that previous stop-gap efforts to solve the problem
relied too much on austerity measures that prevented developing
countries from rebuilding their economies. Speaking to a
conference of 9,000 moneymen in the South Korean capital of
Seoul, Baker called for a three-year lending increase of $29
billion, mostly from commercial banks.

Banks ordinarily would have been reluctant to extend more money
to the debtors. But the Government's support made such
big-city institutions as Citicorp and Chase Manhattan more
wiling to take the chance. Indeed, U.S. banks generally grew
healthier in 1985 as they emerged from a two-year crisis of
confidence among investors and depositors. Some other U.S.
banks, though, had a tumultuous year. More than 115 failed
during 1985, the highest number since the Great Depression.
Most were small ones buried under a pile of failed farm loans.

The savings and loan industry also had its troubles. In March
customers of 69 S and Ls in Ohio stampeded to withdraw money
when the failure of a Cincinnati thrift threatened to bankrupt
the state's private deposit-insurance fund. Ohio Governor
Richard Celeste temporarily closed the S and Ls and required
them to apply for federal insurance. Two months later, Maryland
Governor Harry Hughes seized temporary control of 102
institutions after a similar panic developed.

The most talked-about slump of 1985 was in home computers.
Sales dropped to an estimated 2.3 million from 1984's 3.3
million. Companies that had rushed to market with new products
were violently shaken out of it. Coleco dropped its Adam
computer in January, and IBM stopped production of its PCjr in
March. Even so, sales of the more powerful personal computers
used in business continued to grow, and demand for some very
large units boomed. IBM's long-awaited new mainframe machine,
which had been nicknamed the Sierra, costs about $5.5 million,
but it still sold so briskly that economists predicted the
machine alone would boost fourth-quarter GNP growth by a full
percentage point.

Among the casualties of the computer troubles was Steven Jobs,
the brash co-founder of Apple who started the firm in a
California garage nine years ago. After a bitter power struggle
with John Sculley, his hand-picked president, Jobs left in
September, taking five top employees with him to start a new
computer company. Said he:  "I am but 30 and want still to
contribute and achieve."

Though high tech was laid low, some traditional industries
thrived. Detroit auto-makers sold 15.6 million new cars and
trucks, up from 14.5 million in 1984. During late summer,
normally a slow period, auto-makers offered 7.7% and 7.5%
financing, which put car keys in the pockets of more than
800,000 Americans. Chrysler workers went on strike for eight
days in October, demanding an end to the concessions made when
the company was at the brink of bankruptcy in 1979-82. They won
increases in wages and benefits that returned them to a par with
their colleagues at Ford and General Motors. To gear up for
foreign competition, GM put forth plans to build a $3.5
billion, state-of-the-art factory that will produce a new
subcompact car called the Saturn. The company's announcement
in January kicked off a furious battle among 36 job-hungry
states that wanted the plant. The winner:  Tennessee.

Profitable airlines battled in 1985 to expand their reach by
acquiring less healthy ones, or parts of them. United paid
$900 million in April for Pan Am's famed Pacific routes.
Discount carrier People Express increased its service from 32
to 45 cities between January and August, then paid $300 million
in November to acquire Frontier Airlines, which added 55 more
cities in the West.

During 1985 the business pages often looked like the police
blotter as investigators uncovered case after case of corporate
crime. Big- name businessmen and corporations were accused of
transgressions ranging from defense-contract fraud to money
laundering. Paul Thayer, former chairman of LTV, the steel and
defense conglomerate, and Deputy Secretary of Defense under
Reagan, was sentenced in May to four years in prison for
obstructing justice. Thayer had given friends inside
information about upcoming mergers. E.F. Hutton pleaded guilty
in May to a check-kiting scheme that bilked some 400 banks out
of about $8 million.

The gaffe of the year, though, was a question of taste rather
than legality. In April, Coca-Cola changed the formula of its
flagship brand for the first time in 99 years. Gushed Chairman
Robert Goizueta at the time:  "The best has been made even
better."  But Coke lovers rose up in anger at the new, sweeter
taste. Three months later the company brought back the Real
Thing, dubbing it Classic Coke. Said President Donald Keough:
"The passion for original Coke was something that just flat
caught us by surprise."  By fall, old Coke was outselling the
new by 3 to 1, but total 1985 Coke sales were up about 8%.

If Coke was surprised by an unexpected turn, then the
third-largest U.S. oil company, Texaco, was mortified by one.
A Houston jury in November ordered it to pay $10.5 billion in
damages for snatching Getty Oil from Pennzoil in a takeover
battle. A judge upheld the decision, but at year's end the two
firms were trying to reach a compromise settlement.

Thousands of companies were busy reorganizing during 1985 as
the merger fever touched nearly every industry. In
broadcasting, Capital Cities Communications bought ABC in march
for $35. billion, and General Electric picked up RCA, the parent
of NBC, last month for more than $6 billion. Cigarette maker
Philip Morris bought General Foods in September for $5.7
billion. Some ambitious deals, however, started to come apart,
even before the ink was dry. At year's end, Ted Turner's
proposed $1.5 billion takeover of MGM/UA ran into trouble when
the cable-TV king had difficulties raising the money.
Nonetheless, an estimated 3,000 acquisitions took place in 1985.
For all those companies, the afterglow of the big deal will
soon wear off, and the job for 1986 will be to make the mergers
work.

--By Stephen Koepp