Industry Has Tools to Be Productive After Slowdown

The symptoms are ominous. The pulse of business is slow, orders are feeble. The stock market suffers from fits and fevers.

And yet “it doesn’t feel like a recession,” says longtime investment banker Eric Lomas after visits to companies across the U.S.

For the vast majority of businesses, finances are healthy, unsold inventories are moderate and companies are responding quickly to the slowdown.

Thanks to investments in the last decade, American firms, and increasingly those in every major economy, possess an awesome ability to efficiently deliver a tremendous variety of goods and services.

Extraordinary levels of investment in recent years are responsible. In the last five years U.S. private industry invested about $2 trillion in information processing, software and communications equipment, according to the Commerce Department.

The money was well spent. Practically every major world economy chalked up productivity gains, not only in high-tech areas but in basic industry. Makers of machines and tools that support the manufacture of everything from cars to cardiac pacemakers--and industries from construction to transportation--have been transformed.

Yet that doesn’t mean the downturn is an illusion. U.S. stock markets, taking a pause after an epic run-up, have given back $5 trillion in share values. The downdraft has made big investors jittery and cautious. Layoffs are increasing and consumers are cutting back on their spending.

Also, the turning of a $300-billion federal budget deficit into a $300-billion surplus, an otherwise positive development, has undeniably removed a river of government funding from the economy.

Remedies are being put in place: hurry-up tax cuts, lower interest rates and increases in the money supply. But the cure for a stalled economy may take six to eight months, reckons Lomas, president of HT Capital Advisors in New York and a veteran of three decades in investment banking.

Meanwhile, some analysts are looking ahead, gauging the health of basic industry and thinking of long-term opportunities.

In a world that will be building roads and power plants, homes and factories over the coming decades, Caterpillar Inc., themaker of construction equipment and industrial engines, “has fabulous prospects,” says analyst Barry Bannister of Legg Mason Wood Walker, a Baltimore investment firm.

Caterpillar, which has $20 billion in revenue, also makes diesel and turbine engines that are in great demand from operators of oil-drilling rigs and owners of factories in California who fear power outages. “Cat invested in its engine business in bad times and now it is reaping the rewards,” says analyst John McGinty of Credit Suisse First Boston.

Bannister also favors Ingersoll-Rand Co. and Deere & Co., industrial- and farm-machinery companies that foresee lower earnings growth this year. “But we’re looking ahead to 2002,” Bannister says.

Small companies too were looking ahead at Westec, the giant trade show of 843 machine-tool companies at the Los Angeles Convention Center last week. The turnout of exhibitors was a record, a recognition that Southern California has more manufacturing industry than anyplace else in the nation.

But judging from the machinery on display, manufacturing is not the simple business it used to be, of long production runs of similar items.

Today, the demand is for custom-crafted products at off-the-rack prices, so machine tools must offer flexibility and economy. Computer-aided machines that can shift quickly and smoothly to work on different-shaped parts are the norm.

DP Technology Corp. was at the show with software that eliminates the need for expensive prototypes and helps cutting tools shift gears. “Multi-tasking machine tools that can cut several shapes without interruption are the edge of technology today,” says Paul Ricard, president of DP, a Camarillo firm that was founded in 1982 by two engineers from France, Ricard and Daniel Frayssinet.

They have built a firm of 100 employees and about $20 million in sales that now has a venture with machine-tool maker Marubeni Citizen of Japan, which is testing an advanced multi-tasking product in Asia.

Costs are coming down dramatically. Haas Automation, an entrepreneurial company in Oxnard, has developed a machining station that sells for $30,000 with capabilities that would have cost $100,000 a few years ago. The lower price makes the capabilities affordable to small machine-shop operators, who now can take on more work.

In a changing world, “you have to be lean and agile,” says Peter Hall, sales director for Haas, which has grown in 18 years into a world leader in machine tools.

Small machine shops breed innovations. MKT Tools, a Brea machine shop that made polished wafers for semiconductor production, developed a liquid coolant 12 years ago to sluice over its cutting tools while they were working. MKT’s machinists found that the liquid reduced chipping, made smoother cuts and extended the life of the expensive machine tools.

So MKT formed Cooljet Systems as a separate business that today has 32 employees and almost $10 million in annual sales, 20% in exports.

The bottom-line message of manufacturers small and large is that basic components of U.S. industry are prepared to do well when the economic clouds lift.

When might that be? If tax cuts counteract the “deflation of stock-market performance and business expectations, we can look forward to a rebound in the second half of this year, with profits recovering by 2002,” says economist Albert Wojnilower of Monitor Clipper Partners, an investment advisory firm.

It might not be the start of a boom, but the recovery would be sufficient for U.S. business to reap the rewards of all its recent investments in productivity. And that’s a healthy prospect indeed.

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James Flanigan can be reached at jim.flanigan@latimes.com.