American business, propelled out of the recession by the recovery's explosive takeoff early in the year, still has not produced the boost in capital spending that is necessary to ignite the second stage.
A survey of companies--in financial services, appliances, automobiles, industrial equipment and energy--indicates there is confidence in a continuing recovery. But there also is concern that without stability in interest rates, the rapid gains by industry will be aborted. And a lagging worldwide recovery and strong dollar are hurting American exports and putting tremendous import pressures on basic industries like autos and steel, just as these companies are trying to right themselves.
George L. Ball, chief executive of Prudential-Bache Securities Inc.--the amalgam of the nation's largest insurance company and the sixth largest brokerage firm--says that banks and other lenders remain uneasy about lending funds at lower rates, lest they become trapped by a sudden upward interest rate spiral later this year or next.
If that fear continues, Ball says, it will continue to depress the amount of corporate borrowing, and thus, the amount of corporate investment.
But Ball believes lenders will be compelled to lower rates this fall. "There appears to be a great deal of money available for loan. Banks and other lenders have been reluctant to put it out," he said. "But business is simply not anxious to borrow at this level, so it is quite likely that rates will begin to come down."
General Electric Co. is still riding the boom in consumer spending and housing that touched off the recovery nine months ago. But while excutives of the huge Fairfield, Conn.-based conglomerate say they've seen signs of recovery both expected and unexpected, they also report continued lags in some areas, particularly export markets.
GE perhaps is feeling recovery the most in its businesses related to the fast-rebounding housing market: products such as major appliances and residential electrical components.
"Our consumer durables business the generic category that includes major appliances is very strong," says Walter K. Joelson, GE's chief economist. "The strength is not only in that part of the major appliances that we sell to contractors, but also the major appliances we sell through retailers as replacement models"--indicating that while consumer spending may not be rebounding as quickly as many economists would like, consumers are spending their money on big-ticket items like refrigerators, washers and dryers.
The surge in GE's electrical component business--including products like residential electrical meters and transformers, as well as electrical equipment used by other appliance-makers--is attributable, Joelson says, to the aftershocks from a sharp reduction in manufacturers' inventories of the parts during the recession.
The recovery in housing is following fairly standard patterns, Joelson says. But the recovery in some of the company's other businesses is not. GE is finding that big manufacturers who buy manufacturing equipment from the company are purchasing the equipment even though those manufacturers have no need to expand their production capacity. Instead, Joelson says, they are buying equipment that will improve the efficiency of their existing, underutilized production lines--equipment like robotics and automation devices that make up the factory of the future.
"People are making capital investments not to expand their capacity, but to become more competitive," Joelson says. This demand is being driven in part by the overvalued U.S. dollar, which is making imports relatively cheap, forcing domestic manufacturers to strive for every measure of productivity and efficiency to stay competitive.
Demand for equipment is even coming from industries such as steel, which have been hardest-hit by the recession and are, in many cases, making the investments, in Joelson's words, "by hook and by crook. . . . They have to scrounge around for the necessary funds."
For those companies, the investments could represent a short-term financial risk--with the possibility of long-term payoffs. But Joelson believes that companies that don't make capital investments in productivity improvement now are taking a bigger risk--that domestic competitors will sweep by them as the recovery builds.
GE itself is making such investments in productivity, even in areas where its factories aren't running anywhere near capacity. In its diesel locomotive business, for instance, the company is moving quickly to modernize plants even though there is little demand at present for the locos. Similarly, the company has modernized many of its appliance-making operations, and is reaping the benefits now as demand for the products increases.
But not all of GE's diverse operations are enjoying recovery. "The international export situation is quite precarious," Joelson says, noting that much of the world is either still locked in recession or just beginning to recover.
Ted Eck, chief economist at Standard Oil Co. of Indiana, believes demand from the industrial sector must grow if the recovery is to be a strong one. "Consumer-led economies can only go so far," he says. "Once these demands are met there must be an increase in total investment activity and consequently an increase in jobs."
Because the industrial sector has not jumped onto the recovery bandwagon, Eck says, "This is a delicate recovery."
Such heavy industries as steel and autos, which use about half the nation's industrial fuel consumption, are picking up steam more slowly than in past recoveries, putting a damper on energy demands, he says.
Still, Eck sees the recovery proceeding apace for the energy industry. "I'm pretty confident that total oil demand will go up," he says. "There's certainly no current evidence of a weakening of petroleum demand in the United States"--although he adds that overseas sales remain weak as the recession lingers there.
Steady domestic demand will strengthen the oil industry, which has recently been battered after years of booming results by a slump in demand and a glut in inventories that drove down prices. Petroleum industry inventories have now been reduced, and such important indicators as well-drilling statistics are on the rise, particularly as more federal land becomes available for drilling.
Eck emphasizes that "the key to a sustained expansion in the past has always been investment. There's very little evidence that we're seeing a very significant increase in plant and equipment expenditures."
As a result, anything that would retard new investment and industrial growth--such as higher interest rates or an increase in taxes--would be "fatal to the recovery," Eck says.
For Cross & Trecker Corp., a major machine-tool maker headquartered in Bloomfield Hills, Mich., the recession hasn't ended.
Shipments in the third quarter ending June 30 were valued at $31.1 million, a 71 percent decline from $107.1 million worth of machinery shipped in the same quarter last year.
"Our orders are beginning to increase, but the shipments will remain depressed at least for another year," said CT spokesman Richard O. Priebe. Shipments always lag behind orders in the machine tool industry, which produces the equipment needed to make most of the nation's durable goods, Priebe said.
But CT's situation is aggravated because the company is the world's leading producer of flexible manufacturing systems. Such systems are more expensive than the single milling and drilling machines, or the "dedicated" transfer line machine tools--used in the rapid production of large volumes of identical parts--found in the auto and other assembly line industries. Flexible manufacturing systems, which integrate the use of computers and robotics in machine tool arrangements, also take longer to build.
There's also the reality that recovery in the machine tool and steel industries often trail a pickup in the rest of the economy. Many manufacturers have to deplete inventories before they begin producing more goods, which means they can delay any new machine purchases. And other manufacturers, such as those in the auto industry, have idle production capacity that can be pressed into service as needed.
Still, some industry analysts see a glimmer of hope. The slowly increasing orders for machine tools mean that inventories are going down and that manufacturers are gearing up cautiously for expanded production, analysts say.
Chrysler Corp. this year emerged as the most visible sign of recovery in the domestic auto industry.
The nation's third largest automaker, virtually bankrupt in 1979, posted strong sales, paid off $1.2 billion in federally guaranteed loans, outbid competitors for 14.4 million shares of its own stock (which could have hurt Chrysler had they fallen into unfriendly hands), and moved into the 1984-model market with a group of highly competitive products.
The company also plans to pay $110 million in back dividends on its $2.75 preferred stock on Dec. 15. Chrysler had missed 16 consecutive quarterly payments on the stock since 1979. The December payment would clear the way for a dividend payment on Chrysler common stock; and it could also lead to the award of long-delayed executive bonuses.
Chrysler still isn't getting much respect from investment-rating services, however.
For example, Moody's Investors Service Inc. has assigned a B2 rating to Chrysler's overall credit standing, and Standard & Poor's Corp. has tagged a B rating to Chrysler's major unsecured debt and a C rating to the company's preferred stock. All three ratings are so low that one Chrysler official remarked: "It's almost like having no rating at all."
But Chrysler's successful $311 million bid last week to buy back government-held warrants representing 14.4 million shares of Chrysler stock has improved the company's ability to sell bonds and other marketable securities, a Moody's spokesman said.
Chrysler gave the warrants to the government in return for the life-saving federally guaranteed loans. Now it plans to retire them, thereby eliminating the risk of someone else using them in a way that would depress the value of the company's stock.
"We feel a lot better about the company. But the question is: 'Do they have enough clout and financial stability to withstand another downturn?,' " the Moody's spokesman said.
Chrysler's answer is, "Yes." The company sold 657,832 new cars between Jan. 1 and Sept. 7 of this year, a 22 percent increase over 541,015 sold in the same period in 1982. Chrysler's recently signed contract with the United Auto Workers union will cost the company $1 billion over the next 25 months. But the contract is preferable to a strike in the 1984 model year, when the company is introducing a whole new line of products, including the minivan.
Chrysler's primary concern now is winning back a stronger credit rating, which would give the company access to the money it says it needs to continue fortifying its competitive position.