Know blips from smudges before going to the cleaners

The Economy

January 22, 1996|By Jay Hancock

LAST YEAR The Sun ran 2,369 stories, columns and briefs containing the word "economy" -- more than six a day on average.

This might seem to support the complaints of people who say that news agencies "micro-report" on the economy, assigning too much importance to meaningless increments and decrements.

Naturally, economics writers disagree.

Newspapers do often pay attention to tiny budges from the status quo. It's their job. Papers appear every 24 hours.

They try to report what's different today from yesterday. Sometimes it's not very much. But, with luck, what ends up in the paper is seldom unimportant.

And in business, even the tiny pieces can be crucial.

A few percentage points one way or the other don't look like much on a chart of economic indicators.

But consider what they represent: jobs, unemployed people, imports, homes, buyers, sellers.

And in the economy, significant change often happens at the thin margins.

Last Wednesday, Intel Corp.'s disappointing earnings prompted record volume in its stock on the Nasdaq exchange. More than 68 million shares changed hands.

Even so, at least 92 percent of Intel's ownership on that day didn't do anything.

They held on to their shares. Only 8 percent of Intel's stock was bought and sold. (It may have been even less, since many of the 68 million shares probably were traded more than once.) But that 8 percent dragged the stock price down by a tenth and knocked nearly $5 billion off of Intel's value.

Analysts argue about whether Maryland's economy will grow by 0.5 percent this year or 1.5 percent. The difference wouldn't even show on a proportional bar chart. But that one percentage point of contention also represents 21,600 extra jobs, enough for each resident of College Park. That's 21,600 paychecks, 21,600 rent or mortgage payments, 21,600 grocery kitties.

The economies of the state and nation are so huge that even little movements yield big consequences.

At the same time, businesses by their nature are sensitive to economic nuance. It's not by accident that they call it profit margin. After buying, processing, marketing, transporting and selling its product, the typical company is fortunate to have 5 percent of its revenue left over to keep. Some get by on 1 percent profit.

Like a hippo on a bicycle, a firm doesn't require much of a push to topple it.

And even mild fluctuations in the larger business cycle often mark violent currents underneath.

The U.S. steel industry ebbs and flows like the tide at Mont St. Michel. The industry shipped 112 million tons in 1974; in the next recession output fell to 80 million. It rushed back to 100 million tons in 1979, then plunged to 60 million in the early 1980s. Profits took a similar ride.

Bethlehem Steel Corp. has such a stake in macroeconomic currents that it pays Robert A. Wendt a goodly salary to measure them from its Bethlehem, Pa., headquarters. Mr. Wendt pays especially close attention to interest rates, he said, "because our customers have such a high degree of interest-rate sensitivity."

When typical car-loan payments rise above $300 a month, Beth Steel's business tends to fall, for example.

When machinery and commercial-building finance rates drop, sales boom. Every quarter-point in the Fed funds rate is key.

Maybe the steel business, a model of cyclical extreme, isn't the best example. But every company must be attuned to the economic edges, even small stores. Especially small stores.

In a very bad year, an established merchant might see sales fall by 10 percent. Nine in 10 of her customers may have visited and bought goods as usual. The missing 10th, though, could render the store's profit into loss. Especially if the merchant hadn't allowed for lower demand by stocking fewer goods.

For a retailer, there's almost no such thing as a meaningless economic indicator, says Laura Baughman, president of the Trade Partnership, a Washington economics consultancy.

"Things like housing starts give you a sense about whether you should be ordering more sheets and towels," said Ms. Baughman, who does work for the International Mass Retail Association.

"The unemployment rate is a good indicator of what's likely to happen to consumer confidence.

"Any one of these indicators can have significant negative or positive effects on a retailer's bottom line. The more information a retailer has, the more he or she is able to predict how much to buy, what to buy, when to buy it and how to price it."

So the next time you read that the Index of Leading Indicators has fallen by two-tenths of a point, tell your dry cleaners about it.

Baltimore Sun Articles
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.