July 31, 1998
Paul Solman examines how the Asian economic crisis is affecting the US economy and how businesses are working to control the slowdown.
PAUL SOLMAN: A firm like many others, tucked away in a leafy industrial park just off Route 128, the road that rings Boston. This is Robotic Vision Systems, high-tech, high concept, and up until very recently high rolling. The high concept is making machines that can see and inspect everything from product bar codes to flaws on the outside of computer chips. And the chip business especially has been booming. CEO Pat Costa.
PAT COSTA, CEO, Robotic Vision Systems: The dramatic growth of the semiconductor industry is driven by the fact that in our daily lives there are tremendous numbers of chips being used, and, you know, the average consumer may not realize this, but in their home they may own as many as 50 micro processors or controllers. I mean, it's more than just what's in their personal computer. It's refrigerators and appliances. In fact, I saw in the store yesterday a toaster that has a micro processor controller.
PAUL SOLMAN: Now as chip makers have prospered, so has the chip inspection division of Robotic Vision, fueling the firm's growth from 30 employees in the early 80's to a thousand by the start of this year. But such growth brings with it vulnerability to a slowdown after the fast times, a potential post boom bust. Robotic Vision had been selling most of its inspection machines to chip makers in Asia. So, last summer, when Asian economies wobbled, Pat Costa began to worry.
PAT COSTA: The first thing we did was speak to our customers and ask them, the manufacturers of semiconductor chips, whether they thought the impact would be great on them. And the answers we got mostly were no. And this might have been a little whistling by the graveyard, but certainly we weren't hearing from our customers any signs of distress until early this year.
PAUL SOLMAN: At the start, that is, most people wanted to believe the Asian plunge was simply a dip. That optimism may help explain why there was so little immediate damage to the U.S. economy, and, indeed, even though by some estimates Asian consumers buy 25 percent of the world's computers these days right through last winter. Orders were humming throughout the industry. Chief Financial Officer John Acari.
JOHN ACARI, Chief Financial Officer: It was the most dramatic downturn I've seen in my 16-year career. Essentially, we came through the first two months of the year thinking that we would have a record quarter in the quarter ended March, and the surprise to ourselves and across the industry, as we found out in the month of April, nobody bought any equipment in the month of March; they just stopped buying.
PAUL SOLMAN: Were you shocked by it?
JOHN ACARI: Not only was RVSI shocked by it but virtually the total semiconductor capital equipment industry.
PAUL SOLMAN: After the shock came the layoffs. At RVSI there was a first round in April, some 10 percent of the work force cut, largely at a plant in Long Island, New York. At another one in New Hampshire manufacturing VP Al Hubbard had to let some of his people go as well. Then in June a further 15 percent had to be downsized, including Hubbard, himself.
PAUL SOLMAN: When you laid people off, yourself, the first round, did you anticipate that you, yourself, would be on the receiving end?
AL HUBBARD, Former VP of Manufacturing: I didn't anticipate it. It's always a possibility. But-
PAUL SOLMAN: What odds would you have given?
AL HUBBARD: Oh, they would have been slim.
PAUL SOLMAN: When did you begin to think that maybe it was going to be you too?
AL HUBBARD: The day I found out.
PAUL SOLMAN: So you were really-
AL HUBBARD: When my boss told me that he and I no longer had jobs.
PAUL SOLMAN: Now Hubbard says he's sure he'll find other work. Several workers he laid off already have. His former firm, meanwhile, says it will find other work too, even though the chips are down, by diversifying into other lines of business. And RVSI has diversified before. In fact, it started like making solid photographs, scanning the head of a celebrity like actor Red Buttons to make the perfect bust. But the secret to the firm's future fortunes may be a new scan technology for identifying products. Instead of the bar code supermarket scan, RVSI has developed a more complex code that captures far more data. Senior VP Earl Rideout.
EARL RIDEOUT, Senior Vice President: Standard bar code uses a line or a laser. This uses the CCD camera, which means it takes an image, and that image can be on anything from a business card.
PAUL SOLMAN: This is John Acari's-he's the chief financial officer-card.
EARL RIDEOUT: That's correct.
PAUL SOLMAN: And here it is. I see, and here it's coming out on the screen.
EARL RIDEOUT: Right out on the screen. This is a good example of the difference in the size between today's bar code and bar codes of the past.
PAUL SOLMAN: This is just Mennen Speedstick Deodorant.
EARL RIDEOUT: That's correct. When you look at the bar code, it's this size versus the large bar code that we're all familiar with at the supermarket. Maybe the most potent advantage is the fact that you could put it directly on a part. The Army is interested in marking every single part, from a bullet to a tank.
PAUL SOLMAN: Well, maybe the 2-D Matrix will revive RVSI. But what about firms without radical new technologies, or those not yet affected by events in Asia?
PAT COSTA, CEO, Robotic Vision Systems: It seems that the semiconductor industry is the front end of high-tech, which, in turn, is the front end of the general economy. And it's as if we're at the prow of the ship, and we were hit first by this storm.
PAUL SOLMAN: It was time for top management to head for New York to meet with the investment community and try to reassure it that RVSI is adapting to the Asia downturn. The question we were left with: How is the rest of the economy responding?
PAUL SOLMAN: Well, as already reported, the economy has slowed significantly of late, according to today's data. And joining us now to discuss the current slowdown and the economic future are David Wyss, chief economist for Standard & Poor's DRI, an economic forecasting firm, and Jim Wilcox, economics and finance professor at the University of California, Berkeley. Both are former staff economists at the Federal Reserve Board, and, gentlemen, welcome to you both. Professor Wilcox, how real a slowdown is this?
JIM WILCOX, University of California, Berkeley: Well, the slowdown is real. We had expected the economy not to grow at the very rapid pace that it grew during the first quarter, but it's still growing along, though not nearly as quickly.
PAUL SOLMAN: So, David Wyss, what are the factors, I mean, the major factors?
DAVID WYSS, Standard and Poor's DRI: Well, the second quarter had a couple of special factors in it. No. 1, the General Motors strike took about a percentage point out of growth during the quarter.
PAUL SOLMAN: Now, when we're talking about second quarters, it's the last three months.
DAVID WYSS: Right. And that was June really. It all came out in June, but it was a percent off the quarter as a whole. And the other point is we had a big inventory correction. Inventories were accumulated a record pace in the first quarter. But the shelves are full. And in the second quarter the accumulation of new inventory slowed down to about half the pace of the first quarter.
PAUL SOLMAN: Can you explain, Professor Wilcox, what it means to have an inventory slowdown, then we'll get right to Asia.
JIM WILCOX: Certainly in the first quarter businesses really add a lot to their warehouses and to their store shelves. During their second quarter they also added a lot to their inventories. They just didn't add as many more. Presumably, they were adding these inventories because they were quite confident that, in fact, there would be businesses and consumers there to buy those goods in the upcoming quarters.
PAUL SOLMAN: But doesn't that mean that they lost confidence, then, if they're not adding more inventories, David Wyss?
DAVID WYSS: No, they still have-even in the second quarter they have more inventories than they had in the first quarter. They are still adding inventories. So it's not a sign that they are less confidence.
JIM WILCOX: In general, in order to maintain the ratio of inventories to sales at a constant level, a constant ratio, the companies need to add about 35 to 40 billion dollars. Even in the second quarter they added more than that. Plus, in the second quarter a lot of the inventory reduction was actually reduction in the number of cars sitting on dealers' lots, because General Motors wasn't producing them.
PAUL SOLMAN: That I understand. What about Asia? We just heard President Clinton talk about Asia, the agricultural imports are down-exports from this country are down to Asia because they haven't got the buying power anymore.
JIM WILCOX: Well, total exports were down 8 percent at an annual rate in the second quarter. We're shipping out a lot fewer goods because nobody has any money to buy. And that's what scares me about the future. The long-term deterioration and the longer-term slowdown over the course of the next year depends on what happens in Asia much more than it depends on what happens in the United States.
PAUL SOLMAN: You know, we heard that CEO, Pat Costa, Prof. Wilcox, talk about his company being and high-tech in general being the prow of the boat and that the rest of the boat is going to begin to feel the effect of Asia. Do you think that's true?
JIM WILCOX: I don't know that I would say that they are necessarily the leading indicator for the economy as a whole. Remember, if we were to look at consumers, which really comprise about 2/3 of the total economy, consumers feel very good about their current condition. They feel good about the upcoming conditions. They're spending a lot, and they have good reason to spend a lot. Business spending here at home is still very strong, so it's still the case that the economy has a lot of forward momentum in it.
PAUL SOLMAN: Well, isn't consumer confidence down? You're talking about U.S. consumers, I assume.
JIM WILCOX: Yes.
PAUL SOLMAN: So isn't consumer confidence down somewhat?
JIM WILCOX: The most recent reading was, but still it remains at a very high level and throughout most of 1998 it has risen. So consumers are still, I think, frankly, happy about their current conditions and they're very hopeful and reasonably confident about their future conditions.
PAUL SOLMAN: So, David Wyss, the American consumer is going to bail us out, according to Prof. Wilcox?
DAVID WYSS: I'm not convinced the consumer can continue to spend at this pace, because they're spending great, but they're spending more money than they've got. Consumer borrowing is hitting record levels and consumer bankruptcies last year hit a new record.
PAUL SOLMAN: Consumer bankruptcies hit a new record?
DAVID WYSS: We had almost 1.4 million bankruptcies in 1997. That's a record level of bankruptcies for the consumer sector. Credit card defaults are hitting new records.
PAUL SOLMAN: But this is during a time of boom. I thought bankruptcies usually come when there's a recession.
DAVID WYSS: Yes, and that's what scares me. What happens if we do have a recession?
PAUL SOLMAN: Professor Wilcox.
JIM WILCOX: Nonetheless, the job market remains very strong. We've had an unemployment rate below 5 percent for a number of months. It's around 4 ½ percent now. Wages and salaries are growing very nicely. Consumers are doing very well to the extent that they own stocks and bonds. Interest rates are very low. We've had a very, very strong home building and home buying and selling period. So it seems to me that we can imagine that consumers would reasonably spend very strongly over the next couple of quarters.
PAUL SOLMAN: So, Professor Wilcox, you're not worried about exports going down, the way the president suggested.
JIM WILCOX: Oh, I think it's possible exports will remain very weak. Certainly, the weakness and the sluggish performance for a number of years in the Japanese economy and of all the economies that depend a lot on Japan is a worrisome prospect. I think that's exactly right.
PAUL SOLMAN: But what about bankruptcies? David Wyss has been talking about, bankruptcies even in the time of boom we have more bankruptcies than we've ever had, that doesn't bother you?
JIM WILCOX: Well-
PAUL SOLMAN: I don't mean-I'm not trying to personalize this. I just mean bother you theoretically.
JIM WILCOX: Well, bankruptcies have been high. In fact, I think to some extent they've been inexplicably high. A number of financial institutions have talked about how consumers who have never missed a single payment and don't even have a past due payment, who might have even made a full payment say a couple of weeks earlier, all of a sudden send in a letter that says I just went bankrupt. So it seems as if to some extent we're observing some consumers declaring bankruptcy when it's not obvious that they're having job troubles, particularly, or that they even have particularly onerous debt levels.
PAUL SOLMAN: So it's the bankruptcy scam, is it, David Wyss?
DAVID WYSS: I'm not sure it's a scam. I don't think the courts are quite that easy in letting people go bankrupt. The blunt fact is it's easy to explain because household debt is now running about 95 percent of the average household's income.
PAUL SOLMAN: 95 percent of the-
DAVID WYSS: The average household owes 95 percent of its annual take home pay.
PAUL SOLMAN: Compared to what in the past?
DAVID WYSS: That's up-it's been going up about a percentage point a year for the last 20 years.
JIM WILCOX: It is true that there are very-there are high consumer debt levels, but partly that just reflects the consumer's confidence in the current position and the outlook for the future. One reason people are willing to take out 30-year mortgages to buy homes is because of their confidence that they will have the jobs and the salaries to repay those mortgages.
PAUL SOLMAN: David Wyss, you're shrugging here.
DAVID WYSS: Well, the problem is that based on the bankruptcy rate the confidence is sadly misplaced.
PAUL SOLMAN: You know, David Wyss, you've referred to this as an awfully old expansion. Expand on that point, if you would.
DAVID WYSS: This is now the third longest expansion in post war history. Now there's nothing that says that expansions die of old age. They don't. They die because somebody makes the mistake or there's a policy error, or there's an external shock. Well, we're getting that external shock now.
PAUL SOLMAN: Asia.
DAVID WYSS: From Asia. And is that going to be the shock that during this negative-the way that for example the invasion of Kuwait turned the 1980's into recession?
PAUL SOLMAN: Well, but it didn't turn it into recession for long.
DAVID WYSS: Well, it didn't, and typically the long expansions have ended in mild recessions, not in deep recessions.
PAUL SOLMAN: Now let's get Prof. Wilcox in on this. What about the notion that it's an awfully old expansion, meaning it's got to come-at some point.
JIM WILCOX: Eventully I suppose there will be a recession but I would actually call this a wonderfully long expansion. I don't see-I think to the extent that David does-clouds that are quite as dark on the horizon. I think, for example, for one thing most of the usual conditions that we would be concerned about don't seem to be as worrisome this time.
For example, the inflation rate seems to be very low and very well behaved. Policies, both fiscal policy, the government's tax-and-spend policy, as well as interest rate policies by the Federal Reserve, leave us in a good position to respond if the economy should weaken. It is true, if things should turn decidedly worse in East Asia and in Japan, this will be a serious drag on the economy, should that happen, and that's why we're so interested in Japan doing the right thing for their own economy.
PAUL SOLMAN: Are we bailing East Asia out at this point, David Wyss?
DAVID WYSS: Well, we're helping Asia because Asia is relying on exports to get out of this mess, and we're about the only ones left to buy, and our problem is-
PAUL SOLMAN: With all these credit cards that you're talking about?
DAVID WYSS: We're already running a deficit of $16 billion in May alone. How big can we run a deficit? How much more deficit can we run? How many more imports can we absorb before our economy hits a downturn?
PAUL SOLMAN: You know, what about the stock market? We don't have much time left, but does the stock market going down in the last few weeks indicate to you that there's a general malaise or-
DAVID WYSS: I think the market's overvalued and I think what's happening in the market now is that the companies are seeing the earnings hit because of a loss of exports to Asia, and on the currency translation from overseas, and that's beginning to be reflected in the stock prices. I think the market's overvalued. I think it's due for a correction, and my guess is we'll see that correction-a good guess October.
PAUL SOLMAN: Jim Wilcox, last word, very briefly, to you. Correction in October?
JIM WILCOX: I don't know when or if-
PAUL SOLMAN: You're a finance professor.
JIM WILCOX: --we'll have a correction, but I think people are getting some very sobering news out of Japan, in particular, and this is, I think, why, in fact, we can help Japan to some extent by buying some other goods that really Japan has to help itself, and that's really what the world economy needs at this point.
PAUL SOLMAN: Okay, gentlemen, we'll have to leave it there. Thank you both very much.