As a seachange brews this year for economies around the world, many investors are . . . Hanging Tense : Contagion? Deflation? Real Trend Is Evolution

The best thing you can do when looking over investments at this time of year is try to ignore what everybody is talking about--the Asian contagion and deflation--and open your mind to events and trends that are certain to be important in 1998.

A list of trends for the year will include such factors as how companies and employees, assisted by technology, are working in different ways these days. How that contributes to a worldwide pattern of disinflation. What that promises for interest rates and investments.

Thinking about such factors may not give you a sure-fire prediction for the economy’s growth rate, much less the behavior of stock markets. But you would know with confidence why things are happening in the world’s economies and the names of some companies making a difference.

There is talk of deflation in the air, for example, because Asian countries are going to work overtime to send cheap goods to America. But Asian countries always work overtime. Yet their cheap goods are not the main reason U.S. inflation was below 2% last year and will be low again this year.

Rather, the disinflation in the U.S. and other economies--prices going up slightly if at all--results from the different ways companies and employees work these days.

Honeywell Inc. is a longtime supplier of controls for processes in the chemical, oil, pharmaceutical and food and beverage industries. But its business has changed as it has developed software to run production lines and buildings more efficiently.

“We used to send equipment on a truck with a guy to help the customer install it,” says Honeywell Chief Executive Michael Bonsignore. “But now we send our own people to work the process at the customer’s plant.”

Honeywell helps customers design the processes they will use, the level of controls and lighting their buildings require. “Business today is more of a partnership than the old-fashioned vendor-purchaser relationship,” says Stephen Hirshfeld, Honeywell’s vice president for strategy and planning.

Indeed, Honeywell sometimes works jointly with competitors--such as the Allen-Bradley division of Rockwell or Siemens of Germany--and sometimes competes against them.

The result of all this blending of roles is a more efficient use of resources, less waste, lower prices. Enhanced communications make it all possible--through either internal company computer linkages or Internet networks communicating with customers and suppliers.

Though some of the efficiencies are a form of automation, they still create jobs. Honeywell’s employee totals have grown from 51,000 to 57,000 in the last three years.

Companies are working more efficiently all over the world. Honeywell gets 40% of its $8 billion in revenue from abroad, where it competes with Siemens, Switzerland’s Asea Brown Boveri, Japan’s Yokogawa Electric and Italy’s Finmeccanica.

Nor is emerging China exempt from change.

Johnson Electric, a Hong Kong-based company, is a leading global supplier of micro-motors for windshield wipers, hair dryers, cake mixers, hand tools, office printers and fax machines. The company, which had $360 million in sales last year, manufactures in Guangzhou, China--but with a difference.

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Chairman Patrick Wang Shui Chung, a Purdue-educated engineer, brought in U.S. methods to upgrade production workers’ skills and rewards. “We don’t simply produce motors to keep in inventory,” Wang explains. “We work in constant consultation with our customers all over the world, and we produce to restock their supplies or in response to new orders.”

The efficiency of Johnson Electric’s system is in sharp contrast to most of China’s state-owned factories, which are producing massive amounts of goods, from television sets to refrigerators. That’s the bulk production that economists fear will flood world markets, bringing on deflation and recession.

But Wang says of China’s factories: “They’re dinosaurs. The factories have to modernize or they might as well close down.”

What he means is that suppliers of cheap goods can’t easily break into world markets that increasingly involve the kind of sophisticated production that characterizes Johnson Electric, Honeywell and the rest.

Their shift of business practices carries other lessons as well. One is that disinflation is not a matter of single shipments of low-priced garments or semiconductors, but rather results from a continuing process of efficiencies in world industry.

Also, the increased productivity inherent in changed ways of working allows the 4% average wage increases that most economists predict for ‘98, without aggravating inflation or alarming the Federal Reserve Board.

The U.S. economy has reached full employment--and then some. Twenty-one states have unemployment rates below 4%, which spells labor shortages, says economist Lynn Reaser of Barnett Banks in Jacksonville, Fla. “Companies are offering bonuses and training to retired people if they will return to work; in Orlando, Disney and Universal Studios are recruiting far and wide for help at the amusement parks,” she said.

Technically skilled employees are in short supply everywhere. That’s why Accustaff Inc. and Robert Half International, firms that supply professional temporary help, have grown rapidly. Manpower Inc., the Milwaukee-based giant of temporary services, has grown to almost $8 billion in revenue in 43 countries as supplying labor has become a global industry. For ‘98, Manpower reports the strongest outlook for hiring in the history of its 14-year-old survey.

Capital is also being used more efficiently. That’s why interest rates are relatively low and likely to go even lower, says David Cohan, a Santa Barbara-based trader of futures and currencies. “The world is changing, bond markets have opened up in Italy and Spain,” said Cohan, referring to countries that lacked stable, inflation-resistant economies until recently.

Patricia Klink, founder and president of Advisers Capital Management, a New York- and Santa Barbara-based company that counsels pension funds, sees interest rates declining in ’98 and bond investments producing double-digit returns.

In contemplating investments for the upcoming year, there are a number of related trends and companies coming to the fore. Rapidly increasing use of Internet communications lies behind much of the shift in global industrial practices. And intensifying Internet activity is a certain trend for ’98.

That’s why WorldCom, which owns one of the main backbone networks of the Internet, bid $37 billion last year for MCI Communications, another major backbone provider. The resulting firm could become a powerhouse. GTE, which lost the bidding for MCI, also has a strong Internet presence and many potential merger partners.

The launching and operations of communications satellites will be a major growth industry in 1998. Motorola will start up its Iridium network of low-orbit satellites, allowing mobile telephone calls from and to all points on Earth.

Hughes Electronics, now operating solely in satellite production and operation as a subsidiary of General Motors, will see a record year for satellite launches--and the possibility of suitors looking to acquire it, says aerospace investment banker Jon Kutler of Los Angeles’ Quarterdeck Investment Partners.

What is happening on a large scale is that the industrial world is using the tools of information technology to become more efficient. And that is providing full employment at rising wages in the U.S., which is now setting an example for countries in Europe and Japan.

Meanwhile, from South Korea to China to Southeast Asia, the developing world has to transform its industries and economies--not to make them cheaper in wages and prices, but to make them more skilled and efficient. There lie the real trends underlying the world economy as 1998 begins.