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1994-95: Review And Outlook : '94/'95: Trends : Top 10 Business Stories Of 1994


In a year marked by dramatic changes, these 10 events dominated the world of business and economics in 1994:

1. Interest Rates Take Off

With the U.S. economy gathering steam, the Federal Reserve Board stepped on the brakes--six times, in fact. The central bank raised short-term interest rates to slow the economy and curb inflation.

As usual, fallout from the Fed's actions was widespread.

Bond prices plunged in the face of the rising rates, and the simultaneous jump in yields--the Treasury's 30-year bond climbed above 8% for the first time in 2 1/2 years--also gave the stock market fits, leaving many stock averages in the red for the year.

The rate hikes also caused huge losses for municipalities and industrial companies that speculated with "derivatives"--essentially, risky bets on the future course of lending costs, exchange rates and commodities prices.

Rates on home mortgages, auto loans and other consumer debt naturally rose as well, but so did savings rates--if more slowly. Bank certificates of deposit and money market funds suddenly appealed to many investors wary of the jittery stock market.

2. Orange County Goes Bust

The Fed's rate hikes claimed their biggest victim in Orange County. Longtime Treasurer Robert L. Citron had used heavy borrowings, exotic financial instruments and other risky strategies to bet heavily on a drop in rates. But with rates rising instead, the affluent county shocked the world by declaring that its investment fund had lost $1.5 billion--a figure later raised to more than $2 billion--and then filing for bankruptcy, marking the largest municipal failure on record. Citron resigned.

Orange County's debacle sent ripples across the nation. About 180 municipalities that had invested in Orange County's pool found their cash frozen, placing them in fiscal jeopardy. Wall Street firms that had held billions of dollars of the county's securities as collateral--in order to loan the county even more money--sold it in just days. The municipal bond market teetered, and there were widespread calls to reform local finance practices.

3. Southland Shakes

The 6.7 earthquake Jan. 17 rocked the state economy, but businesses showed surprising resilience--including transportation firms that quickly adapted to repair freeway damage near the quake's epicenter in the San Fernando Valley. The temblor gave California's construction industry a shot in the arm, which in turn helped the economy maintain its slow climb out of recession.

But there was no denying the earthquake's financial devastation. Total insured damage is expected to reach $10 billion to $12 billion. The disaster seriously depleted the capital of Woodland Hills-based insurer 20th Century Industries, which was forced to sell a major stake to American International Group Inc. for badly needed cash. Dozens of stores in the Valley were destroyed, and the Northridge Fashion Center has yet to be completely rebuilt.

4. California Mends

Finally. The state economy emerged, albeit slowly, from one of its most severe and stubborn recessions in recent memory. California's jobless rate dropped to its lowest level in nearly three years, and UCLA predicted a gain of 111,000 net new jobs in 1994. Consumer confidence improved, and manufacturers began spending again for new plants and equipment. The housing market stabilized, in rough terms, after prolonged declines in prices and sales.

Problems remained, however. Layoffs and plant closings in the state's battered aerospace industry rolled on, in lock step with defense spending cuts. McDonnell Douglas chose to build its newest jetliner in Texas--the employment potential is 5,000 jobs--rather than in Long Beach, saying California business costs were too high. The rise in interest rates threatened to derail the rebound in home sales; housing and commercial construction remained weak.

5. The Merger Returns

The deals were back--with a vengeance. Huge corporate takeovers, friendly and hostile, occurred in the aerospace, health care, telecommunications and railroad industries. But unlike the go-go 1980s, when many a buyout was aimed at busting up the target company to enhance the predator's return, most of these deals were designed as strategic marriages.

Case in point: Lockheed Corp.'s $10-billion "merger of equals" with aerospace rival Martin Marietta Corp., expected to close this year. Ditto Rockwell International Corp.'s $1.6-billion purchase of Reliance Electric Co., whose motors Rockwell covets to enhance its industrial automation line.

Railroads also sought partners to gain efficiency and better compete against the nation's truckers. The biggest target: Santa Fe Pacific, a major West Coast railroad, which got $3-billion offers from Union Pacific and Burlington Northern.

6. Trade Barriers Ease

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