More of the same. For the U.S. economy, that's the outlook for 1997: more moderate growth, more low interest rates, more modest inflation, more gains in jobs and income. Business could even get monotonous, some forecasters say, ticking out steady 2% to 2.5% growth, quarter after quarter. "It looks real boring right now," says Southwest Airlines Co. CEO Herbert D. Kelleher.
Perhaps so. But with the current expansion heading into its seventh year, "boring is good," says Chris Varvares of forecaster Macroeconomic Advisers LLC in St. Louis. After all, the alternative is recession--the fate that befell all other peacetime expansions, except the 1982-90 cycle, before they reached their sixth anniversaries. This time, the economy just paused to catch its breath in 1995--and now appears poised to grow without a break through the rest of the decade.
That optimism shows up in BUSINESS WEEK's poll of top executives: 93% say they're optimistic about the 1997 economy, with 82% predicting that growth will match or exceed 1996's performance. That will be reflected in their own companies, the execs say, with 81% forecasting profit gains. The only clouds the executives see on the horizon are wage pressure--84% expect rising wages in 1997--and hikes in health-care costs. Even so, economist Bruce E. Steinberg of Merrill Lynch & Co. notes that inflation has never before remained so tame this late in an expansion--a sign that what he calls "the too-good-to-be-true economy" can keep rolling on.
All happy forecasts, however, aren't alike. Indeed, under the economy's placid surface are strong currents that create sharply varied projections for different sectors. As the 21 profiles in BUSINESS WEEK's 1997 Industry Outlook reveal, even constant macroeconomic growth won't spell prosperity for all. "The engine is running at a steady pace," says David A. Wyss, research director at DRI/McGraw-Hill, "but that means some pistons are going down even while others are going up."
With the dollar strong, foreign trade will be a drag on the U.S. economy: DRI/McGraw-Hill predicts that the trade deficit will climb by 19%, after adjustment for inflation, in 1997. But that won't keep down businesses that can ride the global demand for American quality and knowhow. As Boeing Co.'s pitch to buy McDonnell-Douglas Corp. shows, U.S. aerospace and defense manufacturers are sitting atop a huge backlog of orders from around the world. Other high-tech industries, such as software, computer, and semiconductor manufacturing, will post strong revenue gains at home and abroad even as domestic capital spending slows. And U.S. service industries--securities firms and business services such as advertising, law, and consulting--hope to capitalize on growth in Asia and Latin America (chart).
HIGHER BAR. Laggards in '97 will be businesses that count on general prosperity to carry them along. One theme emerges clearly from BUSINESS WEEK's profiles: Years of tough competition have raised expectations for quality, service, and innovation. Insurers, for instance, are losing the race for savers' dollars to nimbler brokerages, mutual funds, and banks. Even with continued job growth to support consumer spending, packaged-goods and food-service companies will be scrapping for shares of markets destined to grow only slowly.
Slashing costs is one answer. Chicago-based outplacement consultant Challenger Gray & Christmas Inc. predicts 450,000 layoffs in 1997--down 10% from 1996--concentrated in newly deregulated sectors such as utilities, finance, and telecommunications. "A lot of middle managers will be caught," warns Executive Vice-President John A. Challenger.
But other businesses are turning from cost-cutting toward expansion. Take Varian Associates, a high-tech-equipment maker in Palo Alto, Calif. The company squeezed costs so hard, says CEO and Chairman J. Tracy O'Rourke, that productivity climbed 23% each year in the first half of the '90s. "We can't keep that up," O'Rourke admits. So the company is looking for opportunities to expand sales, especially overseas: Last year, it exported 50% of its radiation-therapy machines, up from less than 20% in 1990.
RATES AT REST. Painful as it was, cost-cutting at Varian and thousands of other companies has been a key to the economy's long run of prosperity. By wringing more output from existing plants and workers--productivity gains largely missed in the government's official statistics--companies have been holding the line on prices. That has been just fine with Federal Reserve Chairman Alan Greenspan, who is determined to leave a low-inflation economy as the legacy of his decade at the Fed's helm. Greenspan has used his interest-rate levers to temper the business cycle's swings.
Now, the economy is so tame that the Fed is likely to spend 1997 on the sidelines: Almost half the 50 economists surveyed recently by BUSINESS WEEK predict no Fed actions on interest rates during 1997. The economy's output of goods and services, or gross domestic product, is likely to grow by 2.3% in 1997, adjusted for inflation, matching its 1996 pace. Inflation will remain steady at just 2.9%, helping to hold interest rates almost constant. Thirty-year Treasury bonds will yield 6.6% on average (charts, pages 88 and 89). Capital spending will continue its slowdown from the double-digit growth rates of 1993-95, with producers durable-equipment spending rising 5.9% after inflation. Job growth will slow from 2% in 1996 to 1.5% in 1997, holding the unemployment rate steady, near November's 5.4%.
Only one major imbalance sticks out: consumer debt, which hovered at record levels of 21% of aftertax income during 1996. DRI/McGraw-Hill predicts that the debt ratio will taper off as consumers grow cautious and put more of their rising incomes in savings in 1997.
A crisis of consumer confidence--say, from a stock-market plunge--would be troublesome. "A shock to the markets could hit households two ways, driving up interest rates and driving down confidence," says Mark M. Zandi, chief economist of forecasters Regional Financial Associates Inc. But even that would not produce a recession before mid-1998, Zandi says, and any downturn would be mild.
Rather than a recession, most forecasters see steady growth around the long-term trend rate of 2.2% to 2.5% for at least the next two years. The big question is what such modest growth will do to wages. Already, many companies are complaining of spot labor shortages. "It's tough to recruit people with technical skills in engineering and manufacturing," says Ronald D. Bullock, president and CEO of Bison Gear & Engineering Corp., a St. Charles (Ill.) machine-tool maker with 200 employees. "We do a lot of internal education, because the product coming out of the public schools is substandard."
Labor is tight at the upper echelons, too. After years of downsizing, many companies are discovering that "there's no bench strength of management," says Chicago headhunter Peter Crist. That's good news for companies that traffic in talent. Manpower International Inc., the temporary-help agency, just struck a deal with the American Institute of Physics to find PhD physicists for short-term assignments with companies.
Despite such demand, total compensation rose at a modest annual rate of 2.8% through the first nine months of 1996. Wages have been growing faster--at a 3.3% rate--but total costs have been held down by slow growth in fringe benefits. If medical costs start to rise faster--or companies add more full-time workers who qualify for benefits--labor costs might start leading inflation. "The folks who say we're in a new era, where wages don't respond to demand, may be in for a surprise," says Daniel J.B. Mitchell, a labor economist at the University of California at Los Angeles.
LONG VIEW. One force that has kept wages in check is globalization. As U.S. companies expanded abroad, their first priority was to take advantage of cheaper foreign labor to produce goods for established markets. Now, though, U.S. companies are taking a longer-term approach: 76% of the 113 large companies surveyed by consultants at Futures Group in Glastonbury, Conn., say their overseas investments are aimed at winning a toehold in new markets that will take four years or longer to develop. The most popular targets are the nations of Asia's Pacific Rim.
The Pacific Rim will lead the world in growth again in 1997. DRI/McGraw-Hill forecasts Asian growth at 6.3%, down from 6.8% in 1996. The new star is the Philippines, which is starting to privatize state-owned industries and hasn't yet seen the wage hikes that are rampant in other Asian economies. Hong Kong's economy will enjoy an uptick in 1997, says Salomon Brothers Inc. regional economist Kevin Chan. And China's volatile economy could grow 9% in 1997, according to Goldman, Sachs & Co.
All the Asian economies still must invest heavily in infrastructure. "It currently costs more to move a container from southern China to Hong Kong than to move it from Hong Kong to the U.S.," says a report from management consultant A.T. Kearney Inc. It predicts these countries will spend up to $3 trillion on roads, rails, and utilities in the next decade. Consumer-products companies are joining the rush to Asia, drawn by rising incomes. "Huge middle classes are waiting to be born in China, India, and throughout East Asia," says Kearney Vice-President Paul A. Laudicina.
Latin America's economies, poised to grow at an average rate of 4.4% in 1997, are also drawing heavy investments. Mexico should draw more than $7 billion in foreign investment in 1997, two-thirds of that from north of the border, says economist Deborah Riner of the American Chamber of Commerce in Mexico. U.S. railroads are likely to bid this year in the continued privatization of Mexico's rail system. American utilities are finding opportunities to build natural-gas pipelines and electric plants, while U.S. companies are likely to provide most of an expected $2.2 billion in telecommunications investment in 1997. In Brazil, General Motors will invest $3.5 billion in factories from 1996 through 2000, with Ford expecting to spend $2.5 billion and Chrysler, $315 million.
The developed world will offer fewer chances for U.S. exporters. Japan's long-awaited recovery, which took off with 12%-plus growth in 1996's first quarter, has stalled: GDP grew only 0.1% in the third quarter, and DRI/McGraw-Hill projects only a 1.3% gain for 1997.
Growth in Western Europe should match the U.S. pace in 1997. Governments are squeezing their budgets to cut deficits and inflation in hopes of meeting strict conditions for joining the single European currency in 1999. Germany and France have offset fiscal stringency by cutting interest rates and should post 2.4% growth in 1997. But Italy's success at pushing inflation to a record low of 2.2% has stifled growth. Labor protests threaten to undermine Rome's fiscal discipline.
With Continental consumers still largely absent, U.S. exporters won't find many new buyers for their goods. But investment is growing as American companies bet their skills in wringing out productivity can be put to good use among Europe's inefficient companies. Gap Inc.'s 78 European stores--including six opened in 1996--use up-to-date inventory management to turn over fashion lines three times faster than its European rivals. General Electric Capital Services has spent $5 billion on leasing and consumer-credit businesses, as well as snapping up distressed real estate loans from French banks.
The strong dollar adds impetus to such overseas investments. At the same time, it may stymie U.S. attempts to export more. "Every country is trying to export its way out of stagnation," warns Lawrence Chimerine, chief economist of Washington-based Economic Strategy Institute. For U.S. growth, "trade is a big question mark," frets Allen Sinai, chief economist at Primark Decision Economics.
So U.S. companies that want to prosper are still going to have to look for new efficiencies and productivity gains. Even in a smooth-sailing economy, opportunities are mixed with risks. Spectators may find the 1997 economy dull--but it could be anything but boring for American businesses.