The Underperforming Industries
The change in regimes that restored favorable returns in the securities markets, beat back inflation, and initiated sustained economic growth carried a fearful price in terms of the decline of a number of industries that had benefited from previous trends. They are the subject of this chapter, which deals with the industry stock groups that underperformed the 55% gain in the S&P 500 by twenty percentage points or more. Any popular image of a decade of easy stock gains and business profits is belied by the large proportion of the S&P 500 accounted for by underperforming stock groups -- 43% in 1979 -- and by the depth of their decline -- an 88% decline in return on equity, 69% decline in net capital expenditures as a percentage of capitalization, and 16% decline in employment. These industries' protracted problems also contradict various academic theories that a favorable change in expectations or regimes can achieve rapid, painless transition to superior economic performance.
This chapter outlines pronounced industry factors in stock underperformance -- a variable that receives little reference in academic studies of industrial decline in this period. The oil-related, metal and other commodities, heavy equipment, auto, and banking industries made up most of the underperforming industries. Both stock and financial results in these industries underwent a dramatic change in trend, since until 1981 they or their customers were beneficiaries of rising oil prices, commodities inflation, and a relatively weak dollar. Only the steel and chemical industries were in previous secular decline. The Council of Economic Advisors and numerous academics have focused on equipment manufac-