On a Roll : Economy: Businesses are investing with confidence even as economists begin to wonder if the expansion is nearing its limits.

Sooner or later, the bell tolls for every recovery. And now, given the cooler tone to recent economic statistics, some experts have started to wonder: Is the nation’s 40-month-old upturn--middle-aged by historical standards--quietly slipping past its prime?

“We should see a decent end of the year,” predicts David A. Levy, director of forecasting at the Jerome Levy Economics Institute in New York. “I’m a little more concerned about 1995.”

Yet oddly enough, a journey through the nation’s economic landscape gives a different impression altogether.

Companies are loading up on high-tech equipment. Some are installing new assembly lines for the first time in years. Corporate profits generally are strong. Confidence of consumers and executives remains solid. Businesses continue to hire, albeit selectively.

It is an upbeat refrain heard from the operators of machine shops in the Midwest, high-tech firms in Texas, hotels, banks, steel plants and some of the nation’s largest retailers.

Their message: The economic expansion still holds vast reserves of energy, even with the restraining effects of higher interest rates.

“Businesses are looking for loans to expand or modernize, and consumers keep borrowing money to buy cars and houses,” says Bert Ely, a banking consultant in Alexandria, Va.

California, of course, remains near the end of the line when it comes to enjoying the full benefits of recovery. Nonetheless, the national economy “has a head of steam,” says Paul W. Boltz, chief economist at the T. Rowe Price investment firm in Baltimore. “You may not feel it in every region of the country, but the economy as a whole has powerful momentum.”

For evidence of that momentum, look no further than the semiconductor industry. North American chip sales for 1994 are expected to surge 26% to $31.1 billion.

Such ebullient growth is important to the economy, not only because chip sales now exceed steel in dollar value, but because semiconductors are a proxy for the performance of high-tech overall. They reflect demand for such products as cellular phones, personal computers, VCRs, even automobiles.

“I’ve never quite seen it like this,” says Paul Plansky, vice president at HTE Research, a San Francisco semiconductor industry research company. “Usually people say it won’t last, but companies are operating plants 24 hours a day, and you don’t see signs of a slowdown.”

Texas Instruments, which virtually invented the semiconductor, illustrates the blue-sky optimism: The Dallas firm recently completed its first new U.S. semiconductor fabrication line in 10 years. Now it’s building a second.

TI plans to plow an additional $1 billion into new plants and equipment this year, double the level of the late 1980s. Intel, meanwhile, is investing $2 billion, with new chip plants planned for Oregon and Arizona and new capacity in California.

“Everybody is positive,” says Richard Clemmer, senior vice president at TI. “We wouldn’t be investing this kind of money if we weren’t.”

The view from the nation’s industrial heartland is also cheery.

Steel companies are reporting solid profits and building new plants for the first time in more than a decade. In Pittsburgh, fledgling Worldclass Steel is investing $340 million in a new mini-mill on the site of a facility once owned by U.S. Steel.

Demand for machine tools continues to be strong as factories add new equipment to improve productivity and efficiency. Auto makers, meanwhile, are enjoying their biggest boom since the mid-1980s. Sales of pickups, minivans and sport utility vehicles are so brisk that Detroit cannot make enough of them--a bottleneck widely blamed for a summertime lull in sales.

Late last month, Ford Motor Co. announced plans to hire 900 workers and invest $27 million to boost production of its popular F-Series pickup and Bronco sport utility vehicle in Wayne, Mich. Other auto makers are also expanding capacity at their U.S. and Canadian plants.

Such investment could pay off at this stage of the economic cycle. Just reaching its life expectancy--56 months for the average post-World War II recovery--would give the current expansion more than a year to go. And recoveries have been known to last much longer. The last one, which began in mid-1981, survived 104 months.

So auto industry executives have reason for their faith in the economy. A lower national unemployment rate, restrained inflation and the prospect of an export rally next year all suggest the upturn has staying power.

“We see demand for trucks of all kinds continuing to grow,” explains Bob Transou, Ford’s vice president of manufacturing. “And we want to be ready for that.”

Nationally, those who believe the U.S. economy is starting to shift downward can cite recent data on factory orders, economic growth last spring, consumer spending levels and orders for big-ticket items.

On top of that, economists are puzzling over a mystery: Why did the nation’s product inventories stack up so dramatically on warehouse shelves between April and June?

The $56-billion increase in inventories accounted for a stunning 63% of national economic growth in the second quarter. Just working all those excess goods through the system, before factories need to replace them, is expected to push growth rates down to the range of 2% to 2.5% for the second half of 1994, compared to growth levels of 3.6% for the first half. (The revised second-quarter figure is 3.8%.)

Anecdotal evidence suggests that at least some of the inventory pileup was unplanned. Companies, it seems, overestimated the appetite of consumers after last year’s lively Christmas season.

“They stockpiled inventory and fell flat on their faces, because they didn’t pay attention to the facts of life,” says Kurt Barnard, a New Jersey-based retail economist. “The primary fact is consumers are still cautious.”

Overall, the picture is ambiguous. Inventories at the manufacturing level remain modest, a sign that the economy continues to chug along.

“This is the central issue in the debate over whether the economy is slowing down dramatically or merely pausing,” says Ross C. DeVol, an economist with the WEFA Group, a consulting firm in suburban Philadelphia. “We think it’s a pause.”

For his part, Levy sees the Federal Reserve Board’s anti-inflation policy--demonstrated by its five interest rate hikes this year--as the greatest threat to the economy. Historically, he contends, “the Fed keeps tightening until the economy gets into trouble. They don’t know when to stop.”

So far, the effect of higher rates has been largely muted, except for the housing market, where a rally has reached a plateau in recent months. Mortgage rates have climbed nearly two percentage points in the past year. But those and other interest rates remain at roughly half the levels of the early 1980s, and consumer spending has not slowed enough to frighten business.

“Thus far, the economy hasn’t hurt us,” says Bruce Nordstrom, co-chairman of the upscale retail firm that bears his family name.

Catalog sales, launched in January by the Seattle-based retailer, are 50% higher than expected. Every Nordstrom store--there are 77 in 14 states--has enjoyed a sales increase in the past three months.

What’s more, Nordstrom, which just opened its 26th California store in Arcadia and another in Annapolis, Md., also plans new outlets in White Plains, N.Y.; Detroit; Indianapolis; Dallas, and Denver over the next two years. Broadly, retail economists foresee moderate sales gains for the balance of the year, perhaps in the range of 3% to 5%.

“Industrywide, we think there will be a slight upswing in sales,” Bruce Nordstrom says.

The outlook is positive elsewhere in the service sector, where the hotel business illustrates how economic wounds ultimately heal, even though the process may take years.

Hotel construction has screeched to a halt from the mania of the late 1980s, except for low-frills, budget lodging--a shift that has finally allowed demand for rooms to catch up with supply.

And that “creates a profitable business from one that might have been a loser in the early 1990s,” says Mike Leven, president of Holiday Inn’s Americas division.

Hilton Hotel Corp.’s U.S. occupancy rate of 72%, and Holiday Inns’ 63%, both reflect steady rises from recent years, said company executives, who expect occupancy levels to move further upward next year.

“There is more business travel; there is more leisure travel,” says Hilton Chairman Barron Hilton.

For many businesses, there also is more action at the middle rungs of the ladder, in contrast to the flashier 1980s.

Casual restaurants--such as Chevys, Cheesecake Factory, Houstons and California Pizza Kitchen--are the winners in this environment, taking business both from their pricier counterparts and fast-food rivals. Los Angeles-based California Pizza Kitchen, two-thirds owned by PepsiCo, has opened 19 restaurants in 1994 and plans to open 11 more this year.

Corporate America’s spending boom on new facilities and technology has fueled a 10% increase in bank loans over the past eight months, according to C.J. Lawrence & Co. in New York. Major business loans and personal loans by commercial banks have been rising steadily all summer.

“A lot of it has to do with renewed consumer confidence,” says Susan Weeks, a Citibank spokeswoman. “When people are nervous, they don’t borrow much and they don’t spend much.”

Just a few years ago, giant Citibank was teetering on the brink of collapse, dragged down by the recession and huge losses in its portfolio of commercial real estate loans. Citicorp, the bank’s holding company, lost $456 million in 1991 as it hobbled through a painful restructuring that included writing off millions of dollars in bad loans and shutting down offices throughout the country.

By last year, however, the retooling process was largely complete, and the national recovery helped a slimmed-down Citibank earn $1.9 billion. This year’s profit is expected to hit about $2.7 billion, analysts say. By 1995, it could climb to $3.3 billion.

“Just about every area of our business is showing signs of improvement,” Weeks said.

Take credit cards. In the first 90 days of this year, a staggering 700,000 people opened new credit card accounts with Citibank, spurred by an aggressive marketing campaign. Rising home values have also been a boon for the company’s home equity lending business--especially in California, where home prices have finally started to rise after falling steadily since 1990.

“A year ago, people would come in and try to get a home equity loan, but we couldn’t help them because values had dropped and they just didn’t have any equity,” said Eric Daniels, president of Citibank’s California operations. “Now that prices are going up, people can borrow against their houses again. It’s almost like we’ve got a whole new source of profits that we really didn’t have a year ago.”

But as virtually everybody senses, there are important differences between the current recovery and its predecessors. Business is expanding with extreme caution. Even as jobs increase in some areas, they are being whittled down in others. And broad-scale consolidations--like the past week’s proposed Lockheed-Martin Marietta merger--continue in the name of efficiency.

Nowhere are these crosscurrents more obvious than in health care, an industry that is reshaping itself almost independently of the sweeping reform legislation rattling around Congress.

Increasingly, employers are steering their workers into health maintenance organizations and other forms of managed health care that promise lower costs while restricting patients’ choice of doctors. The result has been a wave of mega-mergers: Drug makers American Cyanamid Co. and American Home Products agreed last month to join forces in a $9.7-billion deal; in California, HMOs TakeCare Inc. and FHP International merged in June in a deal valued at $1 billion.

The turmoil is creating challenges for firms that long have been all but immune from competition.

With 6.6 million members, HMO pioneer Kaiser Permanente is the nation’s largest HMO. But Kaiser is mounting its largest reorganization ever, following a systemwide enrollment decline last year--the first drop in half a century. (Kaiser, with operations in 16 states, lost 70,000 members in California.)

The realignment has prompted the company’s first major layoffs. Aiming to streamline its operations and reduce costs, Kaiser is scrutinizing most of its 26,000 jobs in Northern California; more then 3,200 managers will have to reapply for new positions. Kaiser may also scrap plans to open nearly completed hospitals in Roseville and Fremont.

So far, however, the upheaval hasn’t reached Kaiser’s bottom line. The Oakland-based company reported a record profit of $848 million on revenue of $11.9 billion last year. For managed-care companies as a whole, near-term financial prospects are “very strong,” says David M. Lawrence, Kaiser’s chairman and chief executive.

Interviews throughout U.S. industry suggest that such sentiments are widely shared. Add them all up and it explains why virtually all forecasters expect the economy to keep growing at least through next year.

The most recent blue chip survey of economists, a gauge of the profession’s general outlook, found average forecasts of 3.6% growth for 1994 and a more modest 2.7% next year.

“We’ve definitely not reached the peak of the cycle yet. The underlying fundamentals are still quite strong,” says Joe Lavorgna, an economist with UBS Securities in New York. In the coming months, he adds, chances of a recession are “slim to none.”

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Contributing to this story were Times staff writers Leslie Helm in Seattle; Donald W. Nauss in Detroit, and David W. Myers, David R. Olmos, James F. Peltz and George White in Los Angeles.

Slow but Steady

The national economy heads into fall with vigor, if not a full head of steam. Economists are worried about rising interest rates, but business itself seems to be pushing forward with confidence, and consumption remains strong.

Companies are pouring money into plants and equipment ... 2nd quarter, 1994: $637.1 billion

... lending to business and consumers is up sharply ... Major loans at commercial banks: 2nd quarter, 1994: $1,965 billion

... and job losses are starting to moderate. New claims for unemployment benefits: 2nd quarter, 1994: 4.0 million

Source: Unemployment Insurance Service, Labor Department