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Corporate America: Hunkering Down In A Hurry

News: Analysis & Commentary: MANAGING


Fearing a slowdown, execs are slashing costs

During the long bull market, the annual gatherings of the 100 top chief executives who are active members of the Business Council were invariably buoyant affairs. But at the conclave that ended Oct. 10 in Colonial Williamsburg, the mood was as dreary as the drizzle that forced most CEOs to cancel their golf games. "We're coming down the other side of the mountain," reported the Council's vice-chairman, J.P. Morgan CEO Douglas A. Warner III. "We all agree [the economy] is going to slow down," he added, brandishing a survey that found 75% of the Council's CEOs believe the global crisis will depress growth "through most or all of next year." The rest fear its impact will extend for "several years."

But now that business leaders have tossed their rose-colored glasses and focused on the looming slowdown, there may be reason to hope that they can minimize the damage. Even Warner, whose firm is one of the few now predicting an actual recession in 1999, says he is "struck by the speed" with which CEOs are responding to the changing environment. In marked contrast to past slowdowns, when CEOs often tried to postpone their pain, virtually every day brings fresh announcements from companies planning major layoffs and restructurings in the aftermath of a third quarter that promises the first drop in corporate earnings in seven years.

And it's just the first wave. As companies draw up their 1999 budgets, a surprising number are taking such measures as cutting capital spending, reducing hiring plans, or trimming other spending, ranging from advertising to entertainment. U.S. companies "will batten down the hatches," predicts AlliedSignal Chairman Lawrence A. Bossidy, adding, "I don't see any reason to postpone things.""EXCEEDINGLY TOUGH." But the preemptive moves carry their own risks. If companies cut too aggressively, they could make the downturn worse--by convincing workers that their jobs could be the next to go. That might curb consumer spending and push the U.S. into recession. "We are entering dangerous territory," worries David Wyss, chief economist at Standard & Poor's DRI.

Even without a recession, business conditions "are going to be exceedingly tough in 1999," warns Maureen Allyn, chief economist at Scudder, Kemper Investments Inc. With the U.S. economy slowing and much of the world mired in recession, revenue growth will be anemic, under 3%, she says. Meanwhile, profit margins are shrinking as the tight U.S. labor market forces companies to pay workers more. "We are seeing all the signs of a profits squeeze," adds Ned Riley, chief investment officer at BankBoston.

A key reason for the pessimism is that many U.S. companies are worried about their ability to price their way out of profit trouble. Just 4% of the blue-chip companies surveyed by the Business Council said they have "more pricing power" than a year ago, while 62% said they have less. Sure, a weaker dolLar would boost pricing power. But it hasn't yet. On Oct. 13

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