Slower economy shows soft spots

Third-quarter growth of 2.4 percent is the lowest in four years. Manufacturers are likely to be first to feel the pinch.

It may seem strange in an economy well into the 10th year of the longest expansion in US history - and still growing. But get ready for stories about ailing industries, pink slips, and corporate bankruptcies.

A slowing United States economy is suddenly beginning to magnify the problems facing a variety of businesses across the country - from trucking to steel to telecommunications. In the months ahead, economists expect many firms to fold up shop, resulting in a round of consolidations and bankruptcies stretching from the industrial heartland to booming Sun Belt cities such as Atlanta.

The bad news comes at a time when the economy is still expanding, but at a much slower pace. Yesterday, the US Commerce Department revised down its third quarter gross domestic product figures from a 2.7 percent annual growth rate to 2.4 percent.

The new numbers prompt many economists to proclaim that the Federal Reserve has been successful at engineering a "soft landing," that is a slowdown without a recession. But the slower pace will mean real trouble for many companies, particularly because the nation is awash in imports.

"The slower economy gives less cushion to all companies, but those that are particularly vulnerable have high levels of debt or no growth," says Stuart Hoffman, chief economist for PNC Financial Services Group in Pittsburgh.

The nation's manufacturers are among the first to feel the slowdown, prompting a warning from their trade association that the economic landing "could be harder" for industries such as construction and home furnishings.

On Friday, analysts expect US auto companies to report that retail car and light-truck sales declined by 5 percent. Michael Ward, an analyst with Salomon Smith Barney, predicts the auto companies, with higher inventories, will start to slow production by 5 to 10 percent in the first quarter.

"We believe the auto industry will provide plenty of data over the next week or so to those looking for evidence of an economic slowdown," he says.

Since most of the auto industry has a large stockpile of cash, it can afford the downturn. However, the Chrysler division of Daimler-Chrysler, is in a different situation.

"In the past, their claim to fame and their ability to compete with GM and Ford was based on their streamlined management, entrepreneurial drive, and ability to bring a product from design to manufacture quicker than their competition," says John Kollar, automotive analyst at HSBC Securities Inc.

But today, he says, Chrysler management has become a bit more "bureaucratic." He anticipates that it will take a lot of time to get the company back up to speed. This may mean a consolidation of plants or reducing the number of shifts. "They will pull out every possible trick to improve performance, including lowering costs," says Mr. Kollar.

Any trouble in Detroit will be felt quickly by the nation's steel producers, who are already reeling. On Nov. 16, Wheeling-Pittsburgh Steel declared bankruptcy, and its parent company, WHX Corp. reported a loss of $21 million in the third quarter.

The industry says the main reason it's losing money is a rising tide of imports. Steel imports now represent about one-third of all US steel consumption, compared with 22 percent three years ago. The price of cold-sheet steel is down about 30 percent since the spring.

"Imports are driving down the prices for all our products," says Robert Bilheimer, a spokesman for Bethlehem Steel in Pennsylvania.

Steel is not the only industry hurting. Even high-technology companies, such as semiconductor manufacturers, are watching their sales and earnings tumble.

For example, in the first half of the year, electronic and other electrical-equipment firms reported sales growth of nearly 24 percent. Now, this has shrunk to 6.2 percent, estimates the brokerage house Hoenig & Co in Rye Brook, N.Y.

"What we are beginning to see now is that the bubble in high-tech stocks has as a complement, a bubble in technology spending," says Robert Barbera, chief economist for Hoenig. For the high-tech industry, this has meant stock prices have dropped sharply, as Wall Street investors have started to anticipate lower earnings in the future. However, it has yet to result in layoffs or plant closings.

"There are a lot of shortages of engineers and technical people in the industry, and that must be worked through before you see any downsizing," says Steve Szirom, editor of InsideChips.ventures, based in Bellingham, Wash. "I think six months down the road, layoffs and cutbacks might be a bigger factor."

In the dotcom world, there have already been sizeable layoffs as many of the new enterprises have run out of cash. This is likely to continue, particularly after the holiday period. "For retailers, slower sales this holiday season will be a make-or-break situation, particularly for e-commerce companies," says Mr. Hoffman.

The high cost of diesel has crimped the profits for many trucking companies.

This has spilled over to the manufacturers of tractor trailers. According to a report in The Atlanta Journal-Constitution, Dorsey Trailers, the seventh-largest trailer manufacturer, is mulling over declaring bankruptcy. While it tries to renegotiate its debt, it has laid off 250 employees in Alabama and Georgia.

As such layoffs spread, economists expect the Federal Reserve will keep a wary eye. "What the Fed should be watching is for a broader slowdown," says economist Mark Vitner of First Union Bank in Charlotte, N.C. "If we see this weakness become more widespread, then the Fed can worry."

(c) Copyright 2000. The Christian Science Publishing Society

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