‘94 / ’95 THE ECONOMY : Industry by Industry Outlook

Concerns about interest rates, the promise of exports and California’s recovering economy will be some of the key factors influencing business in 1995. Here is what key industries can expect.

* AEROSPACE: The defense sector will keep shrinking--cutting costs and consolidating--even though Pentagon spending cuts won’t be as severe as in recent years. Commercial aircraft firms will slowly begin pulling out of a long tailspin, and prospects remain bright for commercial space ventures. --JAMES F. PELTZ

* AGRICULTURE: California farmers are even more worried than they were last year about federal water sales to urban areas, which could pinch their supplies. But the good news is that post-NAFTA exports to Mexico are way up--fresh strawberry sales increased 580% in the first half of 1994--with more to come. GATT and a proposed trade pact for the Americas promise even more exports. --MICHAEL PARRISH

* AUTOS: A robust auto industry, one of the major drivers of economic growth, expects to reach sales of about 16 million vehicles. But rising interest rates could dampen consumer confidence and empty showrooms. Pressures will grow to raise prices as raw materials costs go up. GM’s painful restructuring continues, as Ford and Chrysler look for record profits again. --DONALD W. NAUSS

* BANKS/S&Ls;: Bankers will be looking East to find out what Washington has in store for them. Banking rules may change as Congress examines the role of risky derivatives in the Orange County bankruptcy. At a minimum, banks may be forced to disclose more information about their derivative dealings. Bankers also want a Republican-dominated Congress to give them more flexibility under laws that separate the banking and securities industries. --THOMAS S. MULLIGAN

* COMPUTERS: Personal computer sales are expected to be strong, driven largely by the arrival of Microsoft’s Windows 95 and the more powerful systems needed to take advantage of it. U.S. unit sales could rise 14.5%, down from the sizzling 1994 pace of 21.2%. Buyers will get more speed and memory for their money as price competition continues and technology improves. --MARTHA GROVES

* CONSUMER PRODUCTS: Manufacturers will continue to weed out losing brands to make better use of marketing dollars. Packaged good companies, such as Procter & Gamble and General Mills, will continue to rely less on coupons in favor of overall price reductions. --DENISE GELLENE

* DRUGS & BIOTECH: After a spate of widely publicized flops last year, biotech firms badly need some major successes. Without them, the cash-hungry industry will face an even stingier financing outlook, jeopardizing weaker players. U.S. biotech firms will form more partnerships with European pharmaceutical makers and start courting Japanese firms. --DAVID R. OLMOS

* ENERGY: Prices for crude oil and gasoline will remain at historical lows. But refiners could tuck in higher profits with gasoline price hikes of 5 cents a gallon or more in the smoggiest parts of the nation, where reformulated gasoline is required beginning Jan. 1. Natural gas prices will remain volatile as pipeline system deregulation continues. --MICHAEL PARRISH

* ENVIRONMENTAL TECHNOLOGIES: Consolidation will continue. Pollution prevention and cleanups for the Departments of Defense and Energy will generate much business. But major federal regulatory laws are due for reauthorization, and the new Congress could cut government rule-making. In addition, a growing movement in California to conform more-stringent state environmental laws to federal rules could encourage firms to postpone environmental work, moderating growth in this once-hot sector. --MICHAEL PARRISH

* HEALTH CARE: Insurance premiums are in decline after years of hefty increases, putting intense pressure on doctors, hospitals, HMOs and other medical providers to cut costs. More mergers and consolidation will result. The industry won’t have to fret about sweeping federal health care reform under a Republican Congress. Instead, most observers expect any federal reform bills will to be small in scope, shifting attention to proposed state reforms. --DAVID R. OLMOS

* HEAVY CONSTRUCTION/ENGINEERING: In California, heavy construction could drop more than 9% from a 25-year high of $7.3 billion in 1994. Caltrans, a major player in public construction, will emphasize seismic retrofits of bridges instead of road building. Most big U.S. firms are seeking work overseas. Yet as the economy improves, engineers and builders of petrochemical, semiconductor and biotech factories--as well as prisons--will win U.S. orders. --MICHAEL PARRISH

* INSURANCE: Insurers will continue to cope with the aftermath of the Northridge earthquake: insured damages of $10 billion and counting. Expect insurance companies to keep seeking repeal of the state law requiring them to offer earthquake coverage. The replacement of combative Insurance Commissioner John Garamendi with Republican Charles Quackenbush has industry hoping for gentler treatment, consumer advocates say. --THOMAS S. MULLIGAN

* INTERACTIVE MEDIA: After nearly two years of hype, business might make money on the Internet global computer network as security systems make it safe to buy and sell electronically. U.S. homes with CD-ROM drives in personal computers could more than double to 10 million. Meanwhile, interactive television will remain stuck in the trial stage; building the much-hyped information superhighway is proving harder than expected. The Southland will become an increasingly crucial center for the burgeoning multimedia industry. --AMY HARMON

* INTERNATIONAL TRADE: California--the nation’s biggest exporting state--stands to gain from free trade pacts with Mexico and the rest of the world. Analysts also point to economic recoveries in Japan and Europe as harbingers of more sales there. And the demand for California-made capital equipment, from chips to computers to drill presses, remains high. --PATRICK LEE

* MANUFACTURING: This sector should continue its robust growth, despite concerns about rising interest rates, higher commodity prices and labor shortages. Demand for machine tools remains high. Steel producers, appliance makers and construction equipment manufacturers project higher sales as exports increase. The ongoing strike at Caterpillar is likely to come to a head. --DONALD W. NAUSS

* MARKETING: Advertising agencies will face continuing pressure; ad spending is expected to grow by 6.5%, slightly less than in 1994. Anticipation of increases in auto spending is good news for Los Angeles agencies, which derive a big chunk of revenue from foreign car makers. But account turnover will continue to be a problem generally, as advertisers look for results in a recovering economy. --DENISE GELLENE

* MEDIA: Broadcasting is off to a strong start in 1995, with the so-called “scatter,” or short-notice, market for advertising at its strongest in seven or eight years. Cable TV operators, however, will continue to be squeezed by federally mandated rate rollbacks, postponing any significant improvement until the second half. Watch for two new networks, one formed by Paramount and United Television, the other by Time Warner. --KATHRYN HARRIS

* MOVIES: Some observers fret about the large number of films and spiraling budgets. Industry executives expect a good summer. But the challenge will be trying to match or top last summer, which set a record for the number of box-office hits topping $100 million in revenue. --KATHRYN HARRIS

* MUSIC: The continued popularity of alternative rock, rap and pop music will fuel growth. Watch for potential newcomers--notably Viacom--and big changes at lagging RCA Records, with a possible shake-up at EMI. Also, the music arm of the new entertainment firm formed by David Geffen, Jeffrey Katzenberg and Steven Spielberg could begin to take shape soon. --JAMES BATES

* REAL ESTATE: Rising interest rates, the Orange County bankruptcy and a sluggish state recovery could all dampen the residential market after a 14% sales jump in 1994. But pent-up demand and the prospect of either falling or stable prices should help. Improving sales would aid home builders, who face slower growth. Commercial real estate will remain overbuilt. --PATRICK LEE

* RESTAURANTS: Consumers’ appetite for value and convenience will continue to reshape the industry, which has been cutting prices and increasing portions. The successful Boston Chicken chain, which is expanding in California, is evidence that the convenience-value formula works. Also, ethnic themes will grow in popularity as Mexican and Chinese food chains expand. --GEORGE WHITE

* RETAILING: Discount chains and some of the better managed department stores will benefit most as consumer confidence continues to build. Also, the long-awaited rebound in apparel sales will materialize as pent-up demand drives interest in new clothing. The planned merger of Ralphs Grocery Co. and Food 4 Less, the owner of Alpha Beta, will create the Southland’s largest chain. --GEORGE WHITE

* SECURITIES: The industry faces uncertainty, with rising interest rates battering earnings. Wall Street’s fortunes will depend a lot on whether rates keep rising. Look for major reforms in Nasdaq operations. Merrill Lynch faces big liability claims over Orange County’s bankruptcy. Goldman Sachs will struggle with over-expansion problems. Expect Prudential Insurance to sell scandal-plagued Prudential Securities. --SCOT J. PALTROW

* SMALL BUSINESS: Small companies are upbeat and poised to hire, continuing their role as the primary generator of jobs in Southern California during its slow recovery. Small firms frequently are more sensitive to changes in consumer spending and are more flexible than larger companies in their ability to respond to economic change. --NANCY RIVERA BROOKS

* TELECOMMUNICATIONS: After yapping incessantly about the new era of interactive telecommunications, it’s time for a reality check for phone companies. New entrants will skim off some of the best customers, while earnings from video-on-demand remain years away. Expect long distance firms to play a more visible role in wireless and local phone services. --LESLIE HELM

* TRANSPORTATION: Despite carrying more passengers, U.S. airlines will continue struggling to show earnings growth because of ongoing fare wars. Watch for the airlines to increasingly use ticketless reservations to cut costs. Package shippers, meanwhile, will look overseas for profit gains, because heavy price discounting keeps pinching their U.S. earnings. --JAMES F. PELTZ

* TRAVEL/TOURISM: After growing an estimated 5% in 1994, domestic travel will slow a bit but still post a respectable 4% increase. The Los Angeles area should also see less visitors, primarily as a result of fewer large bookings at the Los Angeles Convention Center. The weak U.S. dollar, however, should attract big spending German and Japanese tourists. --JESUS SANCHEZ

* UTILITIES: Electric utilities will keep cutting back as California regulators spell out the details of electric deregulation. But utility stocks could rise if the firms slim down enough. The growing use of gas-fired electricity generators will trigger a global boom for natural gas and infrastructure construction. Non-regulated subsidiaries of the big utilities will expand overseas, particularly in Asia. --MICHAEL PARRISH

This report was compiled by Times staff writer Jesus Sanchez.