‘93/’94 Year-End Review and Outlook : Don’t Worry! It’s Just a New Era

This is the year we recognize that we’re experiencing the first economic recovery of the information age.

Until now, thanks to worries about jobs and lingering recession in some parts of the country, the recovery has seemed dubious and uncertain.

But this year there will be national economic growth of 3%, following a burst forward at the end of 1993, and increasing confidence even in California that we are launched on a new pattern for U.S. industry.

We live in a time of information making work more efficient, making work possible. And often we don’t recognize it for what it is.

It is not machines taking the place of employees, but rather machines enhancing human work, allowing greater output for the same amount of input--or increases in productivity.

Information--sophisticated computer networks and advanced telecommunications--gives even small manufacturers like Taylor-Dunn of Anaheim the ability to hold only two days inventory as opposed to seven; gives Chrysler Corp. the ability to design and produce a new car in two years as opposed to four; gives Wal-Mart and its suppliers the ability to distribute goods at half of what it used to cost.

The result throughout the U.S. economy is not stagnation or inflation but productivity and efficiency.

U.S. business now recognizes the payoff from advanced computing and communications technology. That’s why Commerce Department forecasts say spending on plant and equipment will rise more than $50 billion in 1994 and why computer network suppliers like cisco Systems, SynOptics Communications, Cabletron Systems and Novell software show up on lists of investment guru favorites.

And that’s why foreign investment in the United States is picking up again. A study by the Arthur Andersen accounting firm late last year reported that foreign companies are increasing their U.S. investments, seeking access to the world’s largest market or the world’s most efficient production capabilities. Daimler Benz’ decision to produce Mercedes in Alabama is a fresh example of that trend.

Yet many analysts doubt such optimism, maintaining that the U.S. economy cannot grow without sharply higher interest rates and inflation. But they are forgetting the effect of productivity increases.

After more than a decade of decline or slow growth, productivity has been growing 2.4% a year since 1991. That means the U.S. economy has achieved roughly $150 billion more in output with the same or less input of labor, energy, capital and natural resources. It’s a powerful concept.

We have massive change in industry, but not mass unemployment. Joblessness in California is up near 10% because of defense industry downsizing, but it’s at 6.4% nationally. Industry is working at 83% of capacity and there are places where skilled trades are already in tight supply.

In specific numbers, economist Stephen Roach of Morgan Stanley predicts 3% real growth for the U.S. economy in 1994 and says there will be no more inflation than we have now--2.8%.

That means there will be no sudden or dramatic rises in interest rates. “My nervous guess,” says Albert M. Wojnilower, senior economist of First Boston Investment Management, is that short-term interest rates may rise from 3% to 3.5%, but not for another six months. “Long-term bond yields will continue to fluctuate wildly,” he says, “but on balance should rise one-quarter to one-half of one percent in 1994.”

California’s economy will continue to lag. But toward the end of the year, it should pick up, says economist Larry Kimbell of UCLA. And house prices could get firmer this summer, says Richard Diehl, who retired last year as chairman of H.F. Ahmanson, because the burden of bank-reclaimed housing now depressing real estate markets will be absorbed by midyear.

A still underestimated engine of California’s economy is multimedia, the marriage of Silicon Valley and Hollywood. The world of 500 TV channels--whatever that may mean--won’t arrive in 1994, but work is going forward furiously on services for business, from sales programs on CD-ROM to video conferencing to ever more elaborate global communications. Hundreds of California firms large and small, from Disney to Knowledge/Adventure, are in the thick of this developing megabusiness.

The outlook in traditional industries is firmly bullish. U.S. car and light truck sales could rise more than 8%, say analysts. Home sales and new home building will continue to benefit from low mortgage rates.

This will be the year of the great health care debate, with passage of legislation likely before the November congressional elections. Universal coverage and protection from loss of insurance due to catastrophic illness will be brought in, but otherwise there will be few surprises. Changes in medical care to favor efficiency and cost-consciousness are already proceeding throughout the U.S. system.

Many industries, from chemicals and construction equipment to computers and engineering and environmental services, depend heavily on foreign markets, which will be both exciting and uncertain in 1994.

The stagnant economies of Western Europe and the recession-hit economy of Japan are just beginning the process of restructuring that has brought U.S. industry into the information age. So for the next few years, we can expect to see their companies downsizing and reorganizing--probably with the aid of U.S. computer equipment. Interest rates are already coming down sharply in Europe, causing European stock markets to rise. Japan is facing a profound restructuring to a more consumer-oriented society, and its stock market will remain in some turmoil.

Mexico’s economy will grow strongly in 1994, thanks partially to the North American Free Trade Agreement. And the other economies of Asia, including China and Hong Kong, will continue their rapid advance.

Foreign markets are now bread and butter to the U.S. economy. If trade accounts are calculated correctly--that is, if services such as banking, legal and investment counseling, entertainment, travel and tourism are included--one out of every four dollars in the U.S. economy is connected to foreign trade.

In 1993, with congressional passage of NAFTA and support for the General Agreement on Tariffs and Trade, the American public gave its assent to the new global economy. In the same way, Americans have given assent to the information age in their acceptance of industrial restructuring over the last decade.

It’s a bold step--but not a leap in the dark. History is on the side of change.

This year will see direct employment in U.S. manufacturing--already down to 14% of the work force--decline slightly again. But manufacturing output will continue to advance.

The new jobs are related to information industries (as in trucking and transportation needed for more efficient inventory systems) and in financial and health services for an aging population saving for retirement, and in the multitude of tasks related to foreign trade.

The U.S. economy is still in recovery. The boom is yet to come, says economist David Levy, who predicts a surge in high technology exports to such countries as China and Argentina and a major swelling of orders for U.S. aircraft and power plants later this decade.

In 1994, Americans broadly--even we in California--should begin to feel more confident about our future.