Booms, Busts and Birth of a Rust Bowl

By Christopher Byron

For some, 1982 was a year to remember; for many more, a year to forget

It was a year of shocks and surprises, and a time when the astonishing and the contradictory became almost routine. Not in almost half a century had the suffering U.S. economy gone through more wrenching changes in a shorter period than during 1982, a year when interest rates at long last slumped but unemployment soared; when bankruptcies ballooned but the stock market roared; when recession spread across the economy like oil on a mud puddle but business boomed for a growing list of high-tech games and products for computer-crazed consumers. It was, in short, a year of mind-boggling contrasts. More than anything else, 1982 was the year when the three-year-old inflation-fighting policy of Federal Reserve Chairman Paul Volcker, the nation's top central banker, finally paid off, but only while exacting a painful economic toll in the process.

Monthly rises in the Consumer Price Index flattened out and, though interest rates broke sharply at about midyear and kept falling, the contracting economy proved staggeringly painful for businesses and individuals alike. At 10.8% of the labor force, unemployment reached the highest level since 1941, and business failures surged to more than 24,000, higher than in any year since 1932. Nowhere in the country was the misery of economic downturn more acute than in the factory towns of the nation's industrial heartland. As consumers lost confidence in promises of economic recovery, household spending stalled out, shaking the already depressed auto industry. In a slide since 1979, new-car sales skidded to a 21-year low of about 5.7 million units, while unemployment surged to 23% of the auto industry's 1.1 million-worker labor force. The unwillingness, and often even the actual inability, of businesses to expand their plants and production facilities in the face of shrinking demand sent shock waves out through virtually all of heavy manufacturing. International Harvester Co. of Chicago (1981 sales: $7 billion), already deeply in debt to banks across the country because it borrowed to stay afloat as sales plummeted, teetered throughout the year on the brink of outright collapse, surviving on credits from reluctant bankers and suppliers. Hardest hit of all in the downturn were the nation's producers of basic metals such as steel and copper. As demand for metals lurched lower and layoffs swelled, the once pulsing industrial belt that stretches from Illinois across to western New England took on the grim, ground-down demeanor of a half-century earlier, acquiring the glumly descriptive epithet of Rust Bowl. By December, the nation's steelmakers were operating at less than 35% of capacity, the lowest rate since 1938, and at least one concern, the steelmaking division of Lukens, Inc. of Coatesville, Pa., planned virtually to close up for ten days over the Christmas and New Year's holidays, idling 2,600 employees for lack of orders.

In a desperate search for support and assistance, businessmen in such smokestack industries as automaking and steel turned to Washington, demanding curbs on imports of foreign-made goods to preserve American markets for American companies. Though the Reagan Administration remained publicly committed to free trade, as the year dragged on, protectionism began to creep slowly into the U.S.'s dealings with other nations on trade matters.

Acting on complaints from American steelmakers, the Commerce Department issued a preliminary ruling in June holding that foreign steel manufacturers, mostly in Western Europe but including Brazil and South Africa, had been winning American customers by unfairly selling government-subsidized steel on the U.S. market. The ruling could have effectively blocked many of the offending companies from the U.S. altogether. In October the Administration, using the controversial ruling as a lever, won concessions from the foreign governments of the producers involved. In the agreement, the overseas governments promised that they would limit their sales in the U.S. to less than 6% of the total market, a cutback of 1 1/4 percentage points from then current levels.

The robust rise of the dollar, which on average gained 11.4% against the world's major currencies, added to the protectionist pressures. As American exports became more and more expensive and therefore less and less competitive in foreign markets, fears of a record trade deficit mounted. A copious influx of foreign capital, some in flight from economic and political instability abroad and some attracted by the high real rates of return in the U.S., held the dollar up. As West European governments kept their own interest rates high in order to stem the outflow of capital, their economies worsened and their leaders began urging the U.S. to take stronger measures to get interest rates down to tolerable levels. For most of the year, these pleas were ignored.

After recession took hold around the world and global trade slumped, interest rates began at last to decline. Even so, many countries found themselves increasingly strapped for dollars with which to pay their mountainous debts. Among the most surprising victims were a number of oil-exporting nations: Mexico and Nigeria, to name two. Two years ago, the 13-nation OPEC oil cartel gloatingly held the world at ransom for crude oil at prices that eventually exceeded $40 per bbl. But the combination of recession and conservation caused prices to weaken, and by year's end the price of crude had dropped to $30 per bbl. and appeared to be headed even lower. Unbelievable as it would have seemed to most Americans two years earlier, OPEC's survival as a cartel now appears in doubt.

Yet even as the world economy weakened, some businesses boomed as never before. Americans by the millions escaped to the charms of E.T., a 3-ft.-tall space creature lost in suburbia. The movie of his odyssey, E.T. The Extra-Terrestrial, became by far the biggest smash in motion picture history, bringing in $305 million at the box office by mid-December.

On a more substantial note, 1982 was also the year in which Americans fell in love with computers and welcomed them into their homes. For years, number-crunching machines by such manufacturers as IBM and Digital Equipment Corp. had been familiar back-office fixtures of large corporations, and increasingly even medium-size firms. But during 1982, a whole new generation of downsize "personal computers" began multiplying on the desks of small businesses as well as in homes and apartments of people across the country. Driven by rapidly declining prices and manufacturers' efforts to make the machines "user friendly," U.S. sales of the devices soared to $4.4 billion during the year, double the 1981 level.

In spite of the pervasive economic gloom, 1982 was a banner year for savers and investors. Having suffered huge savings outflows in prior years as depositors withdrew their funds to chase after the high interest rates available from money-market mutual funds, commercial banks and savings and loan institutions were at last freed by regulators to offer federally insured free-market interest rates of their own to small savers. The result: a breathless nationwide scramble by banks everywhere to exploit their new-found freedom and snatch depositors back from the money funds.

Nowhere did investors benefit more handsomely than on Wall Street. Abruptly abandoning a costly seven-year struggle to break up AT&T, the world's largest business corporation (1981 revenues: $58.2 billion), the U.S. Justice Department agreed to a surprising out-of-court settlement in which Ma Bell pledged to divest itself of about 75% of its total assets in return for permission to compete freely in telecommunications and computer markets. The action directly affected some 3.2 million shareholders, who late next year will receive, in addition to each ten shares of AT&T then held, one share of stock in each of seven new regional telephone companies to be shed by Bell beginning Jan. 1,1984. Though AT&T's share prices stayed steady during the year, other blue chips performed spectacularly. Sensing in mid-August that the Federal Reserve Board was beginning to ease its tight-money policy in an effort to stimulate growth in the economy and prevent the recession from turning into outright depression, investors surged into the market, sending the widely watched Dow Jones average of 30 industrial stocks on the most explosive upward ride in Wall Street history. By last week the Dow stood at 1012, a 30% climb from its summer low of 777. Bond prices also soared, with 30-year Treasuries climbing some 32% during the year.

Meanwhile, the corporate takeover mania that had been gathering momentum on Wall Street since 1975 reached a new high, or low, in the month-long struggle by Bendix Corp., a Michigan-based auto-parts and aerospace manufacturer, first to take over, and ultimately to keep from being taken over by, Martin Marietta Corp. of Bethesda, Md., another aerospace concern. By the time the saga climaxed in late September, at least two more corporate leviathans, United Technologies Corp. of Hartford, Conn., and Allied Corp. of Morristown, N.J., had entered the struggle. In the end, about $4 billion had been spent, and Allied Corp., with 1981 sales of $6.4 billion, wound up acquiring Bendix, while Martin Marietta limped away burdened with almost $900 million in additional debt taken on in its desperate and ultimately successful fight to fend off Bendix.

The Bendix/Marietta merger fandango added fresh zest to the public's fascination with the ongoing adventures of Bendix's chairman and chief executive officer, William Agee, and Mary Cunningham, formerly a Bendix officer and now a vice president of strategic planning and project development at Joseph E. Seagram & Sons. After the couple were married in June, she continued to be one of his chief business advisers.

The oddest management stumble of the year came when John De Lorean, 57, the founder of the De Lorean Motor Co., sought to pioneer a whole new approach to raising cash for his struggling company. A flashy and brash self-promoter, De Lorean was nabbed by federal agents in the room of a hotel near Los Angeles International Airport and charged with conspiring to possess and distribute cocaine. At the time of his arrest, a portion of the first batch of cocaine (20 kilos) was in an open suitcase in the room. When De Lorean picked up one bag of cocaine, the undercover agents present in the room took him into custody.

For the overwhelming majority of business people, of course, 1982 was a year of neither coke scams nor merger deals, but a relentless slog through a weak economy in hopes of better times. With the economy sicker than at any other time in postwar history, and interest rates at last headed downward, although perhaps not as fast as many businessmen would like, the end of 1982 did at least bring one bit of reassurance: things were not likely to get very much worse before starting to get better. --By Christopher Byron

This file is automatically generated by a robot program, so viewer discretion is required.