To the brink of recession

D'ARCY JENISH November 16 1987

To the brink of recession

D'ARCY JENISH November 16 1987

To the brink of recession


The panic that swept North American stock exchanges on Black Monday, Oct. 19, and during the upheavals immediately following the record-breaking crash had ebbed last week. But investors, brokers and analysts alike still found little solace in the markets and other indicators of the health of the economy. The stock market indexes, which measure the combined values of leading shares on the exchanges, fluctuated wildly and created new anxieties that share prices could plunge drastically again. “Everyone’s looking for answers,” said Gerald Brockelsby, senior vice-president of investments with Toronto-based mining company Inco Ltd. “But we’re not out of this yet. That’s what’s so eerie.” Although the markets failed again last week to produce clear signals about where the economy is headed, there were other signs of emerging trouble. In the bellwether automotive industry, General Motors of Canada Ltd. (GM) announced that it would eliminate an

entire shift, employing 2,700 workers, at its Oshawa, Ont., assembly plant. Then, Chrysler Corp. Canada disclosed that it would temporarily lay off 1,400 workers from an assembly plant in Bramalea, northwest of Toronto. At the same time, the Bank of Montreal released a gloomy year-end economic forecast for 1988, predicting that Canada will only narrowly avoid slipping into a recession next year. The bank forecast that the gross domestic product will grow by only 0.6 per cent next year, compared with an estimated 5.1 per cent in 1987. “We aren’t forecasting a disaster,” said bank chairman William Mulholland. “But there will be a slowing up in the context of a tender, sensitive environment.”

The stock market crash did not cause the auto industry layoffs, but the timing of those two events could be devastating for the economy. Auto analyst Dennis Desrosiers, president of Toronto-based Desrosiers Automotive Research Inc., said that the fact that layoffs have happened at the same time as

the market unrest could destroy consumer confidence. And a slowdown in the auto industry will affect the entire economy, Desrosiers argued. “One in seven jobs in this country is tied to the auto industry,” he said. “If you start announcing layoffs, you are sure to see a ripple effect in the economy.”

General Motors will eliminate its night shift at the Oshawa plant by the end of November. But those workers will share the jobs of the day-shift workers by working two weeks and taking the next two weeks off at least until the end of the year. In the U.S., GM also disclosed that it would shut down a plant in Massachusetts, laying off 3,700 workers. GM said that it was cutting production due to sluggish sales. But Chrysler spokesman Gordon Pfeiffer said that the Bramalea plant was being closed as a result of quality-control problems on a new car—the Eagle Premier—which the company had just begun to produce in October.

Still, Chrysler’s Canadian car sales for the first 10 months of the year were

down 7.1 per cent, to 131,362, from 141,347 in the same period in 1986. Likewise, GM’s 10-month car sales have sagged to 324,189 this year from 354,519 in 1986, a drop of 8.6 per cent. Ford Motor Co. of Canada announced that its car sales had climbed by two per cent. But Ford’s October sales had still dropped by 8.8 per cent from the same month in 1986. Ford spokesman James Hartford said that after several good years sales of North American-built cars have dwindled. At the same time, new Japanese production is coming onstream in North America. Added Chrysler’s Pfeiffer: “With an overcapacity of three million vehicles, something has to give.”

While economists across the country are now revising their 1988 forecasts in the wake of the stock market crash, the Bank of Montreal was one of the first major institutions to release its assessment. And by any measure, it was pessimistic. The bank foresees unemployment rising to 9.5 per cent from the current 8.4 per cent. It predicted that housing starts will drop dramatically to

160.000 next year from an estimated

230.000 in 1987. Business investment, which jumped by 12 per cent this year, will increase only a marginal two per cent in 1988. Previously, the bank foresaw a three-per-cent increase in consumer spending. Now it is calling for no increase. Chairman Mulholland said that the United States can restore some stability to the markets and prevent a recession by cutting its budget deficit. But he said that he was not optimistic about that happening. “It might be necessary for another big jolt to focus their minds,” said Mulholland. “The next two months are going to be crucial.”

But last week, White House and congressional negotiations were bogged down and the lack of progress was evident in the markets. The fluctuations in the New York Stock Exchange’s Dow Jones industrial index were echoed in markets around the world. In five sessions between Tuesday, Oct. 27, and Monday, Nov. 3, the Dow rose to 2014.09 from 1846.49. Then it fell a total of almost 110 points over the next three days. Declared Wayne Deans, a portfolio manager with Vancouver-based investment counsellor M. K. Wong and Associates Ltd.: “We’re not back to the calm days of 10to 20-point movements in the Dow.” He added that since Black Monday, fear has replaced panic among small investors. As a result, when the stock indexes jump, average investors are hitting the markets with smaller waves of sell orders to get out with some profit, or to cut their losses.

But the large institutional and foreign investors are also contributing to the instability. David Neale, senior

vice-president of institutional trading with Toronto-based broker Nesbitt Thomson Deacon Inc., said that European and American investors were still reducing their holdings in Canadian stocks last week. The institutional investors were moving in all directions, he said. Some were moving back into the market to take advantage of lower prices. Others were sticking with existing portfolios and some were selling. Said Neale: “There is no clear-cut consensus in my mind.”

While the big investors watched for progress on the budget deficit, the Reagan administration responded by cutting interest rates and letting the U.S. dollar fall to avoid a recession. After Treasury Secretary James Baker set out the administration’s priorities in a Wall Street Journal interview, the dol-

lar closed last Friday at 1.6705 West German marks, a postwar record low. It also slid to 135.05 Japanese yen, also a postwar low. Meanwhile, the Canadian dollar closed up slightly at 75.73 (U.S.) that day but had already slid from a yearly high of 77.12 (U.S.) on Oct. 16.

Still, as the leaders of the major industrial nations struggled to keep their economies healthy, some observers said that a recession is inevitable. Montreal investment counsellor Stephen Jarislowsky, whose company manages assets valued at $9 billion, said that sharp declines in the stock markets have always been followed by economic downturns. But he added that a slump would create “unique buying opportunities” for shrewd investors because stocks would

remain underpriced. It could also lead to greater corporate concentration in Canada, said Jarislowsky. Such major companies as Montreal-based Power Corp. of Canada, which are healthy and flush with cash, will be able to buy good companies at bargain prices.

But there were still some optimistic voices in the investment community arguing that there were excellent buys available as a result of the stock market crash. Dozens of solid Canadian companies are now trading well below the audited values of their assets because of the collapse in share prices. Said David Wilkes, president of Toronto-based brokerage firm Moss Lawson & Co. Ltd.: “I am fabulously bullish about the market. I have never been this bullish.”

Wilkes said that Toronto-based

Stelco Inc., one of North America’s most efficient steel producers, was trading at less than $20 a share last week, while an analysis of its balance sheet put the value of the company at $28 per share. He also said that Toronto-based Falconbridge Ltd., a major producer of copper, nickel and other base metals, has sharply reduced operating costs since 1982. Any increase in sales or prices will mean higher profits, said Wilkes. “It is difficult to see how you can’t double your money in five years,” he added. But that brand of bullishness likely will not be enough to lure many shell-shocked investors back to the still-fluctuating stock markets.


in Toronto