Advertisement
YOU ARE HERE: LAT HomeCollections

JAMES FLANIGAN

LTV and B of A Show Dark Side of Oil Collapse

July 18, 1986|JAMES FLANIGAN

This was the week that Wall Street, and the rest of us, were forced to realize that the U.S. economy is not sailing on a lifting tide but rather is becalmed and even vulnerable to dangerous eddies.

The business news contained a few scary reminders that falling oil prices are not an unmixed blessing for the nation. LTV Corp., the No. 43 company on the Fortune 500 list, filed for protection from its creditors. The steel, aerospace and oil field supply company is importantly dependent on energy industry markets. And BankAmerica Corp. declared a $640-million loss, mainly on loans gone bad because of falling prices for oil and commercial real estate.

The danger in falling prices is the ripple effect: People who work in the energy industry lose their jobs, which threatens their mortgage payments and thus the banks and savings and loans. On another level, loans on drilling rigs go sour because a rig worth $30 million is no better than scrap iron when it's unemployed, as most rigs are these days.

Similarities to 1929

Substitute farmland and equipment for oil and drilling rigs, and you can see how wide the ripples might spread. But just in case you need it spelled out, more than one economic expert was heard this week reminding the nation of how such ripple effects occurred with a vengeance in 1929 and the subsequent 1930s Great Depression.

Don't be alarmed. The collapse of 1929 is this country's old football injury--almost every time it looks like rain, we get a twinge. For every similarity to 1929 that is cited today, there is a dissimilarity that might be mentioned. And chief among these is that the government today is pumping money into the economy like a farmer feeding store-bought grain to a sick animal.

The government keeps up a happy chatter, saying that declining interest rates will encourage a pickup in business investment and economic growth. But even the government is not dumb enough to expect business investment to grow when a big spender like the oil business is cutting back drastically.

No, it's pretty clear that the point of the Federal Reserve's pushing interest rates down and pumping money into the economy is to keep people and businesses afloat, to prevent bankruptcies and a widening ripple effect. Indeed, says John Rutledge of the Claremont Economics Institute, "If the Fed had followed its strict rules on money supply, we would now have a depression."

Transition Period

OK, so we won't have one. What will we have? Unimpressive economic growth--2% this year, under 2.5% next, thinks Norman Robertson, chief economist for Pittsburgh's Mellon Bank. Basically, the economy now is working through a transition. Oversupply in the energy business is being written off, as is overbuilding in commercial real estate. Business investment that was spurred by terms of the 1981 tax act is being absorbed, but not much new investment can be expected while U.S. industry is working at 78% of capacity.

Transitions, by definition, are passages. When this one is completed, we will see investment rise again, spurred by opportunities at home or in markets arising in Asia. It could happen as early as next year, but if you want a firmer indicator, watch International Business Machines Corp., which sent the stock market reeling on Monday when it reported a decline in quarterly earnings. The overall market fell for two straight sessions, and IBM stock dropped more than $10 a share--the equivalent of $6 billion in market value.

The slow-growing U.S. economy is giving IBM particular trouble, because the computer giant has taken on staff and invested massively through this decade in anticipation of a higher level of business. The result is that it now has too many employees, excess capacity and higher costs than it should have. The decline in its profit margins is what is giving its institutional investors acute anxiety.

Faced with such a problem, most companies would simply lay off staff, close a few plants and wait for an upturn. But not IBM--at least not yet. The company has always had a full employment policy--instead of laying people off, IBM shifts them into marketing, sending them out to call on customers. IBM Chairman John F. Akers has emphasized the company's commitment to that tradition in speeches this year to shareholders and to securities analysts.

That is admirable. But if bad times in the U.S. market go on too long, IBM may have to modify its policy. Already, it has all but frozen hiring. Which at least tells you what to watch for in the economy: If IBM changes its full employment policy, prepare for a long winter. But if it sticks with tradition, you'll know that spring is nigh.

Chances are the tradition will survive.

Advertisement
Los Angeles Times Articles
|
|
|