Imports Squeeze Growth Out of the Economy : Pressure Mounts on Prices and Profits as Firms Strain to Be Competitive
Du Pont, hurt by a 33% rise in textile imports, closed two “state of the art” clothing fiber plants in South Carolina last year.
At Chrysler, the strong U.S. dollar may force the auto maker to produce all or part of its planned Liberty small car in Asia.
And Eastman Kodak estimates that it lost $500 million in revenues since 1981 because of sales lost to imports.
The message is clear. A surge of imports is undermining the economy’s growth. Imports have taken sales from U.S. manufacturers. They have prevented companies from raising prices, putting pressure on profits. They have made business decision-making more difficult.
“It doesn’t matter whether you’re high-tech, low-tech or smokestack, imports are depressing the economy,” says Robert Wendt, manager of economic studies for Bethlehem Steel.
Faced with rising domestic competition from deregulation and other fundamental changes in the U.S. economy, companies have grappled with intensified foreign competition since the recovery began in late 1982 by paring inventories, laying off workers, cutting prices and investing heavily in cost-saving equipment.
Cut Costs to the Bone
But now, many firms say they have cut costs and prices as much as possible and need relief from low-cost imports to keep already slim profit margins from disappearing.
While imports hurt growth earlier in the recovery, the economy was expanding fast enough to easily offset the damage. But imports are beginning to have a more serious impact.
Nearly 40 cents of each new dollar spent by industry and consumers above 1981 levels goes to foreigners, estimates the forecasting firm of Data Resources.
With the economy slowing naturally at the current advanced stage of the recovery, imports are having a more pronouncedeffect on U.S. production. Beyond that, imports simply continue to show dramatic advances, and many executives now believe the trend could shove the economy into a recession next year.
Government data show why business is worried. The Commerce Department said that gross national product--the total amount of U.S. goods and services produced--in the first quarter grew 1.3%. It was less than half the rate estimated a month ago and was the lowest growth rate since the fourth quarter of 1982, when the recovery began.
Corporate profits fell 0.5% in the fourth quarter, largely because of imports. Although housing starts in March reached their highest annual rate in nearly a year, statistics for industrial production and the level of idle plant capacity suggest further slowing.
Uncertainty Hurts
Some companies say economic uncertainty itself is hurting business.
“People seem to be in a holding pattern,” says a spokesman for Cessna, a small-aircraft manufacturer. “We see so many potential customers who couldn’t agree more that they need to upgrade their aircraft, but there’s a reluctance and hesitancy out there about the economy that’s almost impossible to deal with.”
The recent slowdown in the economy, however, may end up making the recovery more sustainable by leading to lower interest rates. Some economists say that banks already are under pressure to lower the prime rate--the benchmark rate for most corporate borrowers--because their cost of funds has declined. The Federal Reserve Board also would feel free to relax credit conditions, they say.
The rise in imports stems in part from foreign government subsidies and low-cost overseas labor. But much of the blame belongs to the surging U.S. dollar, which has made foreign goods less expensive relative to American goods.
A sustained fall in the dollar, along with progress on cutting the record federal budget deficit, would spur renewed growth in the economy and prevent a recession within 12 months, many executives say.
Although some eagerly await the dollar’s fall--it recently has slipped sharply against some major currencies--they also fear too precipitous a drop because it might rekindle inflation by increasing the price of imported goods. Without a corresponding cut in federal borrowing, interest rates also could rise.
“The current situation is quite precarious,” says Ben E. Laden, chief economist for the Baltimore-based investment firm of T. Rowe Price and president of the National Assn. of Business Economists. Unknowns about the direction of the dollar and deficit create a “very unstable and volatile environment,” he says.
Some Are Optimistic
Nonetheless, many corporate executives say they are optimistic about the strength of the economy for 1985. They predict that GNP will grow at an annual rate of 3% to 3.5%, compared to 6.8% in 1984.
Capital spending--a key component in the recovery in 1983 and 1984--will increase 8.7% this year, the Commerce Department forecast, still a healthy rate although significantly lower than the booming 16% growth last year.
Such spending--which has gone more to increase efficiency than to expand capacity--helped strengthen and extend the recovery.
“American business learned a lot from that experience,” says Howard White, managing partner at the Los Angeles office of Arthur Andersen & Co., a major accounting firm. “It’s optimistic even though more cautious and conservative. That’s because it’s tougher and leaner--much better equipped psychologically and literally to weather a crisis or uncertain environment.”
But many companies--particularly in hard-hit manufacturing industries such as steel--say they have cut costs to the bone and can’t trim much more.
Focus on Efficiency
Bethlehem Steel, for example, has cut its salaried work force 45% since 1981 and the average number of hourly wage workers 39% but has increased capital investment every year, all of it going to efficiency. In 1985, capital spending will climb 29.5% over 1984.
The company’s annual losses declined since 1981 and it expects to earn a profit in this year’s second quarter, “depending on what happens with the dollar and imports.”
High-tech industries also are feeling the import pinch. Intel, a leading semiconductor manufacturer, laid off 900 workers and closed two plants in February. Even so, it plans to spend $100 million for new technology and equipment to make the company more efficient.
Some industries, such as textiles and agriculture, have been so battered by the strong dollar that even a fall in the currency may not help very much, some say.
Farmers, who in the 1970s grew dependent on strong export markets, have seen many of their foreign markets eroded in the past few years by the emergence of such nations as Brazil and Argentina as major food exporters and by the growing self-sufficiency in food of the European Economic Community, says Bruce Blanton, an economic research associate at the American Farm Bureau Federation.
So a declining dollar may not trigger an export boom, he says, but may trigger higher interest rates and renewed inflation in oil, fertilizer and other production needs.
Emphasis on Marketing
Textile firms already have boosted capital spending to modernize plants. To compete with imports, they have placed an increasing emphasis on marketing and new-product development.
J. P. Stevens & Co., a leading textile firm, is increasing its new-product development budget by 15% to 20% this year, in part to develop higher-quality products that are less susceptible to imports.
“We’re positioned to fight like tigers, and the only way we can fight is through marketing,” Vice Chairman David M. Tracy says.
The auto industry also faces an uncertain future because of the dollar and imports, which continue to make its high-cost U.S. facilities less competitive.
Not all firms and industries, however, suffer from imports. Many retailers even benefit because cheaper foreign goods lower their costs for merchandise.
Imports also have helped increase the supplies of merchandise for retailers to order, allowing retailers to obtain goods faster and thus adjust their inventories quicker in case of unexpected sales declines. Carter Hawley Hale Stores, for example, now averages only 75 days to obtain receipt of goods, compared to 90 days a year ago. Chairman and Chief Executive Philip M. Hawley says. “It’s not too hard to obtain merchandise,” he says.
But the risk of an economic downturn has made some retailers cautious.
‘Controlled Aggression’
Mervyn’s, a Hayward-based department store chain, says it plans a strategy of “controlled aggression,” in which it will add 25 to 30 stores this year and 142 stores over the next five years, yet watch inventories very closely and adjust growth plans as economic conditions change, says Raj Joneja, executive vice president.
Uncertainty about tax reform and the budget deficit has contributed to a slowdown in economic activity “because everybody is deferring actions to see how these changes will impact them,” First Interstate Bancorp Chairman J. J. Pinola says.
Pinola, who recently cut between 3% and 3.5% of the work force at the firm’s largest unit, First Interstate Bank of California, says he doesn’t see any further staff reductions. But with the sluggish outlook, “there is no impetus to reignite engines either.”
At International Paper, stiff competition from Canada and Scandinavia forced cost-cutting efforts that included a 20% reduction in capital spending this year, but the firm has postponed further belt-tightening.
“It’s hard to tell where things are going,” says John A. Georges, International Paper’s chairman and chief executive. “We’ve done some throttling back, but now we’re holding to see which way the dollar and the economy are going.”
