Riding Out The Storm

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.