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Chemical industry faces slower growth Don't expect the economy to come out of the most recent recession as fast or as far as it has in past recessions. Anyone who looks at the most recent one as a typical recession that will be followed by a typical recovery from 'looking at the world through rose-colored glasses," says A. Nicholas Filippello, Monsanto's chief economist and corporate vice president for financial communications. The problem, Filippello told a recent meeting of the Chemical Manufacturers Association in Atlanta, is that many structural adjustments are filtering their way through the U.S. economy and foreign economies, too. As a result, U.S. companies, and chemical companies in particular, will have to contend with a business climate that includes low inflation and low volume growth. For chemical companies, this combination means less pricing flexibility (read, lower prices) and lower revenue growth, says Filippello.
Thaf s quite a change from the past, when the success of large chemical companies typically depended on raising volumes and prices faster than cost increases. This, he says, is no longer possible. Because revenue growth will be much slower than it has been in the past, companies simply will not be able to allow costs to increase as they have in the past. The structural adjustments that concern Filippello are quite separate and much longer lasting than the typical cyclical adjustments that occur periodically in the economy. Among other things, they include demographics, defense industry adjustments, federal deficit reduction, the Federal Reserve Board's anti-inflation policies, and global overcapacity. In the demographics arena, the economy's dynamics are moving away from the "baby boomer" generation to the generation that followed it—the
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"baby bust" generation, as Filippello calls it. The post-World War II baby boomers had a dramatic impact on the economy. They expanded the labor force significantly during the sixties and seventies. And they had an equal ly significant impact on the consump tion of durable goods, such as cars, and housing. Now, economic growth, and the composition of that growth, is chang ing. That growth in the labor force will be substantially lower during the nine ties than it was in the previous two de cades means that the potential for eco nomic growth will be lower than it has been. In contrast to an average 3.7% per year in the past, he expects that real economic growth in the nineties will not be much more than 2 to 2.5%. Many industries, including several that are key markets for the chemical industry, have become mature as a re sult of changing demographics and other factors. Demographics clearly are driving the auto market, says Filippel lo, who does not expect to see soon the booming auto demand and production that took place years ago. Demographics also are altering the housing market. In the seventies, a good housing year was 2 million starts. In the eighties, a good housing year was 1.7 million starts. But in the nine ties, says Filippello, a good housing year will be no higher than 1.4 million starts, and more likely between 1.2 mil lion and 1.3 million. To him, this means that the housing recovery has already occurred and won't get much better than it already has. Meanwhile, the rate at which syn thetic materials are replacing natural materials is slowing down. In some cases, there's a trend back to using the natural materials. However, the home furnishings mar ket may offer some growth for chemi cals. Although chemicals growth tradi tionally has depended on housing starts, much more of the demand is now being focused on the replacement end of the market. As baby boomers become older and less mobile, they are renovating their homes and are replacing such things as carpets and appliances, usually with high er quality products. Typically, says Filip pello, people in this age group spend any where from 25 to 33% more on home fur nishings than do other age groups. The "build-down" of the defense in dustry is another major structural
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change that is affecting the economy and will for some time to come, says Filippello. Just as there was a positive eco nomic multiplier effect associated with increasing defense expenditures in the past, there is also a negative multiplier effect as spending is cut. Defense industrial production is down about 24% since 1987 and econo mists expect a similar drop over the next three to five years. This, says Filippello, means further dislocations in the economy for the rest of the decade. Another factor affecting the economy is the Federal Reserve Board's policy geared to reducing inflation. Although Filippello believes the board has bro ken the back of inflation, he thinks it will continue to maintain a strong antiinflation policy. Not only will this tend to restrict future growth, it also will give chemical companies less flexibility to raise prices. Efforts to reduce the deficit are, in the long run, a plus for the economy because they will allow capital to flow back into the private sector. But during the adjustment period, taking money out of the economy will act as a drag on it, says Filippello. Some economists think that the low er inflation that will result from deficit reduction will more than offset the fis cal drag. Filippello doesn't think so. He believes that reducing the deficit over the next few years will keep a lid on economic growth. Still another structural adjustment that he sees affecting the economy for many years is the "more than adequate" ca pacity that exists, not only in the U.S., but throughout much of the world. This overcapacity applies to many products, and especially to petrochemicals. Then there's the uncertainty that prevails about the outcome of the North Ameri can Free Trade Agreement (scheduled for Congressional vote this week) and the Uruguay round of multilateral trade negotiations. As a result of these structural adjust ments and uncertainties, Filippello ex pects a global competitive environment characterized by increased power of the consumer. Consumers will be de manding higher quality and lower prices and will have the bargaining chips to obtain them. For chemical management, this will mean focusing on reducing costs, increasing produc tivity, and "doing more with less." Earl Anderson
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