U.S. Economic Picture Is a Contradictory Collage
The latest annual report of E.I. du Pont de Nemours & Co., one of America’s oldest companies--founded in 1802 by a French immigrant who gave the fledgling U.S. armed forces a better grade of gunpowder--is a zinger. On its cover, beside a photo collage suggesting youth and age, management declares: “We are transforming DuPont into the most flexible, aggressive and youngest 200-year old company in the world.”
But Chairman Edgar Woolard’s message inside about “eliminating work and thus reducing our work force and selling or redeploying businesses,” seems sadly familiar. DuPont, the nation’s largest chemical company with $38 billion in sales and almost $1 billion in net income last year, has cut 26,000 employees, or 18% of its work force, since 1989. And Woolard can’t say when restructuring will be finished.
In that, DuPont has lots of company. U.S. business has seen 449,364 layoffs so far this year, including 48,000 in September, and the job elimination rate is running one-third faster than last year.
Yet the overall picture is contradictory. The economy is picking up and employment is at an all-time high. Unemployment--now 6.7%--is low compared to the past, whether 10 years or 100 years ago. And corporate profits are also at a historic high.
Even in the chemical industry, not everybody is shrinking. A Salt Lake City entrepreneur named Jon Huntsman has just acquired Texaco’s chemical division to expand his 11-year-old Huntsman Chemical Co. to $3.5 billion in annual sales. Huntsman--a clue for the ‘90s--has only about 7,600 employees spread around 44 countries.
What it all means is that this is no normal period of recession and recovery; comparing the ‘90s to the 1960s, or even the 1930s, tells us little. We have to go back to the 1870s to find a suitable parallel.
But first, DuPont and Huntsman can offer hints to when this difficult period will end, and how we will come out of it.
The difficulties may well last beyond the year 2000. That’s how DuPont’s Woolard is betting by taking extraordinary measures to trim costs. “He’s made the determination that low growth will continue for the decade and he’s adjusting DuPont’s resources to the kind of business it can do,” says analyst Anantha K.S. Raman of the S.G. Warburg investment firm.
As for coming out of it, if the 19th Century is any guide, the U.S. economy will emerge strong, with investment in new industry.
What is going on now is a worldwide deflation, an end to a long period of growth. Charles Clough, chief investment strategist for Merrill Lynch, likens the past to the popular game Monopoly. “For 50 years it made sense to buy Boardwalk and put hotels on it,” says Clough. Property would always go up; demand would always rise to meet supply.
Now a shift in perspective is needed. “The best strategy is to settle for the utilities and railroads,” Clough says, meaning invest in stocks and bonds because interest rates are low, there is no inflation, and corporate cash flow is rising and available for dividends.
Demographics spell slow growth. The number of Americans in the 18-to-34-year-old prime-buying years is at its lowest in decades. Also, the labor force is growing at less than 1% a year this decade, after swelling by almost 2% a year in the ‘80s and 3% in the ‘70s. When there is less need to create jobs for young workers, economic growth can be slower.
In business, when markets aren’t growing, the only way to get customers is to cut your prices. And if your costs aren’t correspondingly low, you’ll start losing money fast.
That’s especially true in the chemical industry, which deals in commodity compounds that form the basis of our clothing and furniture, cars and appliances. When demand slacks off, commodity prices fall precipitously.
That’s why DuPont and other big companies are trying every which way to cut costs and sell off marginal businesses. Meanwhile, Huntsman knows his small, lean company can buy those castoff businesses, make some money today and perhaps big money tomorrow when, and if, the cycle turns.
This period is rough on the chemical industry’s work force of chemists, engineers and specialists. Such white collar employees are not accustomed to loss of jobs. But now many swell the ranks of early retirees, while others join entrepreneurial companies like Huntsman’s, frequently at lower pay and benefits. Deflation has come to middle class paychecks, as it used to come only to those of blue collar workers.
What should be done? Harvard economics professor James Medoff has written to Treasury Secretary Lloyd Bentsen suggesting the government get off its obsession with the deficit and hike spending to create jobs.
Medoff has a point. The economy needs stimulus--poverty is also at an all-time high. But politically, government spending is a hard sell at a time when the U.S. population is aging and paying attention to returns on its portfolio and pension investments.
These bewildering times recall the long deflation from the end of the Civil War to the 1890s, when prices fell for decades. The 1870s--the time in which the new film “Age of Innocence” is set--saw a depression in 1873 and a slow, moderate recovery, like our own. It was a time of transition, from agriculture to industry, a time when half the people were farm workers, and most of the rest were domestic servants.
And yet within that time investments in new basic industries, steel, chemicals and manufacturing brought forth the flowering of the American economy, the most powerful the world has ever known.
This too is a time of transition. New investments are being made in vaguely understood information industries and in previously less developed countries. Traditional companies like DuPont realize they must make a transition too; entrepreneurs like Jon Huntsman see fresh opportunities. For all the anxiety, there’s excitement in the air.
