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Inflation forces industry to trim investment plans

American industry spells trouble -- I-N-F-L-A-T-I-O-N. Rapidly rising costs for materials and services force many businesses to see the future as a period of uncertainty, instead of opportunity. As a result, management decisions emphasize safety rather than risk taking. Though this seemingly is a prudent course in the short term, if often exacerbates inflation in the long run.

"Eventually it comes full circle. Rapid inflation causes industry to do things that prolong inflation," comments Edward Miller, economist with the nonprofit American Productivity Center here in Houston.

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The cost of finished goods used to manufacture consumer products has risen at a 12.8 percent rate during the past year. Corporations often respond to such high inflation by curtailing investments in new plants and equipment. This puts a damper on technological innovation, Mr. Miller points out.

Eventually, under such circumstances, the manufacturing process becomes less efficient, so the cost of making refrigerators, automobiles, clothing, and other products is forced upward, further fueling inflation.

Can this vicious circle be broken? There is strong evidence that it can -- with investments aimed at improving productivity, producing goods at less cost. Research by the Strategic Planning Institute, a business research group in Cambridge, Massachusetts, has disclosed that such investments not only moderate inflation and consumer prices, but also improve the corporate balance sheet.

"Productivity improvements allow better profitability, even in an inflationary environment," the institute concludes after tracking the actual experience of 1,500 businesses.

Further, the institute's computer data bank shows that firms that increase their efficiency pass on most of their savings to consumers through cheaper prices.

"So it is true: These companies tend to be inflation moderators," asserts one research analyst with the institute.

Indeed, increasing productivity is viewed by much of the business community as th e only major tool at its disposal to combat inflation.

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In the retail industry, for example, competition has kept prices on general merchandise sold in department stores from rising as fast as overall inflation.

"This has put great pressure on us to improve productivity," notes Robert Mooney, chief economist with the J C Penney Company. With consumer prices leaping at a 13 percent annual rate and market conditions holding Penney's prices to a 5 percent yearly rise, "the only way to keep profits up is to be more efficient," he adds.

For J C Penney that has meant reducing energy costs by 20 percent in the past five years, massive investments in modern computer terminals to replace less-efficient cash registers, and redesigning stores so they accommodate more merchandise.

The automobile industry also has invested vast sums in modernization, but much of it goes to meeting stiffer government fuel-efficiency and emission standards. "We've been faced with complete redesigning of our cars, and we've had to buy a lot of new equipment," comments finance executive John R. Edman of General Motors Corporation.

"But every time we buy a new piece of equipment it is to produce our products with the least possible amount of labor," he adds.

The housing industry has made gains in productivity in recent years, with more pre- assembly of building components like walls, roofing, and plumbing. Indeed, labor and materials represent less of the average new home's total cost now than they did in 1970.

Yet construction financing and land costs, which the industry has little control over, have risen sharply. They now comprise more than a third of the price of a new home, compared with less than a fourth just nine years ago, according to the National Association of Home Builders.

Despite a sprinkling of evidence that industries are investing to improve productivity, the general trend in the United States is not encouraging.

For the first three quarters of 1979 productivity in the US -- measured as output per hour worked -- actually declined. Overall, productivity has been rising at about a 1.8 percent annual rate over the past decade, down from 3 percent in the 1950s and 1960s. Since 1960, American productivity has grown less than that of any other major developed country.

Economists debate the causes. But there is a general consensus that post- 1973 fuel price hikes, the influx of inexperienced workers -- women and young adults from the late 1950s baby boom -- into the labor force, and the growing amount of money spent on complying with government safety and environmental standards are likely contributors to the productivity slump.

While US industries are showing increasing interest in improving productivity , some analysts say they believe the vast sum of money necessary to significantly slow inflation requires government help.


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