(FORTUNE Magazine) – THE COOLING ECONOMY will be hard on makers of big-ticket items like cars and appliances. Some of the steam will go out of basic industries. But times will stay good for suppliers of soft goods, consumer services, and capital equipment.

-- CARS: Braking. Alas for Detroit. The global car market is going soft, and guess who loses? ''Basically we're in a cyclical downturn that will continue into 1990,'' says Christopher Cedergren of the J.D. Power & Associates consulting firm. New car and truck sales will decline from 15.4 million last year to 14.6 million this year and 14.4 million in 1990. Worse, the Big Three will lose significant market share to foreign makers, especially the Japanese. Cedergren predicts that cars made by foreigners, including those built in the U.S., will capture 34.2% of new cars sold in America in 1990, up from 30.7% this year. Profits will get clobbered: up 5% this year but down 43% in 1990, says Ann Knight, auto analyst at Paine Webber. Ford Motor especially is a shocker. Earnings will drop 60% over two years to $2.1 billion. Knight blames the big outlays required for another development cycle. GM and Chrysler won't have to go through another until the early 1990s. -- APPLIANCES: Spinning down. The six-year boom is in the rinse cycle. Last year the industry shipped a record 44 million refrigerators, dishwashers, ranges, washers, and dryers. This year unit shipments will decline 2%. But profits of the Big Five -- GE, Whirlpool, Maytag, Raytheon, and White/ Electrolux share more than 95% of sales -- will be up 5% in 1989, says Charles Ryan, a security analyst at Merrill Lynch. ''The industry is quite ready for a slowdown,'' he says. ''They've prepared themselves well.'' Manufacturers will increase prices 4% this year while holding down costs for materials and employees. Shipments in 1990 will slow another 2%. Competition will keep companies from raising prices further, and profits will slip 5%. The considerable consolidation that occurred in 1988 and 1989 will slacken as companies digest acquisitions and push new brands. Europe will be a hot market. Maytag bought Chicago Pacific in January, and with it vacuum cleaner maker Hoover and its large European operations. Whirlpool bought 53% of Philips's European operations. -- CLOTHING: Learning new tricks. After two years of window-shopping, women began buying again last fall, but they have new habits. Says Kurt Barnard, publisher of Barnard's Retail Marketing Report: ''Their days of reckless buying and frivolous purchases have come to a dead halt. The fashions they're purchasing are classic, and shoppers assume they will last two to three seasons.'' The National Retail Merchants Association expects apparel sales to rise 7% in 1989 and 6% in 1990, barely faster than inflation. Profits should fare somewhat better due to lean inventory and tighter cost controls. Some retailers and their suppliers are learning how to cooperate. Says Harry Bernard of Colton Bernard, a consulting firm: ''The future will bring an amalgamation of the two.'' Following such trendsetters as Liz Claiborne and Seattle Pacific Industries, more vendors are helping to set up departments in stores and training salespeople to run them. In return, retailers are paying the suppliers sooner, lowering markups, and not charging for such things as late shipments and incorrect invoices. In almost every case, shop sales increase 15% to 25%, says Bernard. -- FOOD PROCESSING: Cooking up profits. When the drought hit last year, the industry raised prices. Look for a repeat if there's another drought -- and no rollback if the corn and soybean crops are bountiful. Whatever happens, says William Leach, a security analyst at Donaldson Lufkin & Jenrette, net income from operations should grow 12% this year and about the same next. Food processors have more going for them than sticky prices. A public obsessed with health and convenience is snapping up high-margin specialty products. Says Martin Friedman, editor of Gorman's New Product News: ''The buzzwords for new products in the next 18 months will be fiber, fat, fresh, and fancy. We've been hit by hundreds of oat bran products. Rice bran products are next on the horizon.'' Kraft and CPC International have just introduced cholesterol-free, reduced-calorie mayonnaise. Diet foods will expand about 5% in units and 10% in dollars per year over the next five years, says David Sculley, senior vice president at Heinz. Sculley estimates they are bringing in $15 billion a year, a corpulent 6% or so of retail store sales. Food processors will crank out more products for the microwave. Says Friedman: ''It's cocooning. Kids say McDonald's, but parents reach into the freezer for hamburgers and fries instead.'' The kids will get their own products to zap, such as ravioli. Companies will market more products for the shelves, vs. frozen products that are now the norm. -- PHARMACEUTICALS: On a high. So what if the economy slows? Folks keep buying drugs and health care potions anyway. New product introductions, along with the graying of America, will boost sales 8% this year and 10% next, predicts Ronald Nordmann, an analyst at Paine Webber. Net income will spurt 16% and 19%, respectively -- and that's despite the industry's shrinking freedom to raise prices. In the early 1980s the cost of drugs climbed at three times the rate of the consumer price index. Growth has now slowed to less than twice the CPI and may slip below that, says Ronald Stern of First Boston. One reason: The government is pushing generic drugs in programs it funds. U.S. R&D spending will increase to a record $7.3 billion, 16% of sales and exports, in 1989. Drug companies have pumped up their sales forces by more than 25% in the last two years. The hiring will continue, although at a slower pace, according to Scott-Levin Associates, health care marketing consultants in Newtown, Pennsylvania. Companies are forming expert teams that sell drugs only for certain physician specialties like obstetrics. Another marketing ploy, one that Scott-Levin's Joy Scott expects to ''break wide open in the next 18 months,'' is advertising prescription drugs directly to consumers. -- COMPUTERS: Erratic. The past couple of years have been bad for IBM's market share. Big Blue held 35% in 1986 but has only 31% today, says Skip Bushee, director of research at the InfoCorp consulting firm. In the next 18 months IBM will either shore that up or lose a lot more as users accept or reject its operating system standards. Who wins -- the competitors are led by Compaq Computer in PCs and Digital Equipment in larger computers -- hinges on who gets its products into stores first. ''Growth is curtailed until this is worked out,'' says Bushee. Even so, sales of PCs will rise a respectable 7% this year and 9% next, says Donald Bellomy of International Data, a Route 128 consulting firm. Steven Ossad of Montgomery Securities estimates that Compaq's earnings will rise 46% in 1989 and 28% in 1990. Apple's earnings will be up 9% in 1989 and 36% in 1990. Sales of midrange systems, costing $20,000 to $1 million, will be up 5% in 1989 and 3% in 1990, while those of mainframes and supercomputers taken together should rise 1% in 1989 and decline by 1% in 1990. -- INDUSTRIAL EQUIPMENT: Grinding ahead. Heavy-goods manufacturers were among the last to feel the benefits of the seven-year expansion, but they're making up for lost time. Industrial machines are some of America's most popular products abroad -- nearly a quarter of the industry's total output was exported in 1988 -- and much of the developed world is on an investment spree. Shipments abroad and at home will climb a combined 6% this year. Next year total shipments will increase only 3%. Farm equipment sales are particularly strong. After registering a slight dip during last year's drought, they will jump 40% in 1989 and 10% in 1990, says Steven Colbert, a senior machinery analyst at Prudential-Bache. The West Coast and Midwestern housing markets will keep orders up for construction equipment. Demand for mining and highway machinery will climb 11% in 1989 and 9% in 1990. Machine tools show signs of weakening; orders in April were off 4.5% from a year before. The market for heavy trucks apparently peaked at the start of 1989. Orders in April and May were down 33% from last year. For industrial equipment makers as a whole operating rates are high, and Colbert thinks earnings will rise 9% this year and 10% next. -- AEROSPACE: Blessed are the peacemakers. Air traffic keeps growing, even if more slowly, and airlines are eager to replace aging fleets. Result? So far this year U.S. commercial manufacturers' orders for the first quarter are up 76% from last year's first quarter, when they totaled 107 planes worth $5.4 billion. For the full year 1989, the Aerospace Industries Association of America projects sales of planes, engines, and parts to rise 48%. Paul Nisbet, an analyst with Prudential-Bache, expects profits to be up some 30% to 40% this year and 15% to 20% next. (For more, see the cover story.) Keeping up with the demand has strained capacity and quality, but the planemakers are coping. Says Wolfgang Demisch of UBS Securities: ''Boeing is now getting its ducks in a row nicely, and McDonnell Douglas will.'' Military suppliers are struggling to make money. Existing projects are winding down, and real defense spending will decline 3% in 1990. The AIA sees sales rising only 6% this year. Earnings, Nisbet predicts, will be flat in 1989 and down perhaps 5% in 1990. One possible ploy for military contractors: Beat swords into plowshares by becoming subcontractors for commercial aircraft makers. That's Lockheed's strategy. -- CHEMICALS: Cooling. After four strong years, the industry appears to be peaking. Prices will rise by 5% this year but only 1% to 2% next, as demand flattens and capacity grows. By 1990 operating rates will drop from 89% to 86% -- even lower at plants producing plastics, formerly a hot spot of growth. Demand for fertilizers, fibers, and inorganic chemicals will remain fairly strong. Operating income for the industry as a whole, which jumped 45% in 1988, will slow to a still respectable 15% increase in 1989, says William R. Young, a managing director at Drexel Burnham Lambert. But most of the gains came during the first six months. Operating income in 1990 will drop 5%. Half the U.S. chemical industry's output goes to other manufacturers here and abroad, says Allen Lenz, director of trade and economics at the Chemical Manufacturers Association. Thus chemical producers live in fear of a recession. No surprise there -- except that those that have completed capacity expansions wish it would come and go soon. If a recession occurs by 1990, they reason, competitors will shelve planned additions, leaving those that built early sitting pretty when demand picks up again. -- METALS: Losing some luster. After a year to remember, copper and aluminum producers are bracing for a letdown of sorts. Copper has fallen 43 cents from its peak price, $1.60 per pound last November, and will continue down to about $1.10, says Robert Lesemann of Resource Strategies, a Pennsylvania consulting firm. In 1990 global demand will flatten -- in the U.S. it will decline a bit -- and several mines will open or expand. Lesemann says, ''1990 will be the trough of the cycle, but it will be rather mild.'' Earnings for the big copper companies will slow from a 50% increase in 1989 to 5% in 1990, says metals analyst Nicolas Toufexis of Prudential-Bache. Aluminum prices have fallen to 90 cents a pound from the peak last year of $1.90 because of new supplies from Australia and Venezuela. Again, no great pain. U.S. companies switched to production of finished and semifinished goods, such as sheet for cans, which remain in great demand. Toufexis says earnings will reflect near-capacity operating rates, rising 11% this year and 12% next. -- PAPER: Tapering off. The fast earnings gains are going the way of papyrus. Mark S. Rogers, an analyst for Prudential-Bache Securities, predicts that profits will grow 12% in 1989 and 5% in 1990 -- a real comedown from the surge of 50% in 1988. Operating rates will dip slightly from the current 95%. The American Paper Institute reports that plant capacity will increase 2.8% in 1989 and 3.5% in 1990. Annual growth in production is expected to be under 2%. But papermakers will keep spending on plant and equipment. Investment in 1989 should hit a record $15 billion. Export growth this year should keep running at about the same 6% rate as last year. Some analysts think that the mergers and acquisitions of the 1980s will spare the industry from its usual fratricide in the next downturn. Says Nicholas Tetrick of Standard & Poor's: ''Fewer but stronger players can be expected to do a better job of holding the line on price discounting.'' George Adler of Smith Barney Harris Upham & Co. begs to differ: ''The remaining . linerboard makers can still cut each other's throats.'' -- OIL: A steady flow. Given that OPEC seems to be reasonably in control of its membership, Frederick Leuffer of the C.J. Lawrence Morgan Grenfell brokerage firm predicts that earnings for the major oil companies will rise 15% this year but flatten out next. ''Earnings come from all three stool legs,'' says Leuffer. ''Petrochemical and refining profits are setting records.'' Oil prices have softened, but Leuffer says they will still be up 16% this year. Analysts expect the benchmark West Texas crude to generally be in the $18- to $20-a-barrel range through the end of next year. William Randol, senior oil analyst at First Boston, says that with worldwide demand growing about 2% a year, ''there is a cushion for some cheating on the 19.5- million-barrel-a-day OPEC ceiling before prices are hurt.'' Oil service companies and independent producers should also see a rainbow in the slick: Survivors of the past few years' brutal consolidation will be in good shape to capitalize on the higher prices. And John Lichtblau, president of the Petroleum Industry Research Foundation, expects natural gas prices to start rising as the famous ''gas bubble'' shrinks this winter, bringing supply and demand closer into line. The major bad news comes courtesy of Exxon. The Exxon Valdez oil spill will increase costs for companies operating in Alaska. What's more, says Randol, ''the development of the Arctic National Wildlife Refuge is on ice for the foreseeable future.'' -- TELECOMMUNICATIONS: On hold. The seven local-service giants are stuck in a bottleneck. Though the number of phone lines in most parts of the U.S. is growing 4% a year, regulators won't let the companies squeeze more profits out of existing lines. ''For the next 18 months all seven will have to undergo massive belt-tightening,'' says John Malone, president of the Eastern Management Group consulting firm. The cash-rich companies will expand by buying cellular and small independent telephone businesses. But unless they persuade state utilities commissions to regulate telephone service with a ''price cap'' on rates, instead of limiting return on the rate base as they do now, the local-service companies' profits will be constrained. Charles Schelke of Smith Barney thinks profits will rise 5% this year and 7% in 1990. The long-distance Davids, MCI and U.S. Sprint, are battling with AT&T and making tons of money: Their profits will be up 90% this year, says Robert Morris of Goldman Sachs. But Goliath isn't easy to put down. ''Anybody underestimating AT&T is going to have his throat cut,'' Malone says. ''It has turned around its sales force.'' AT&T's share of the $40 billion long-distance market declined from 80% in 1987 to 77% this year, but Malone thinks it won't fall much further. AT&T will earn an estimated $2.75 billion from continuing operations this year, up 23% from last, and $3.12 billion in 1990. -- AIRLINES: Throttling back. After a long boom, growth is slowing. Higher ticket prices, up more than 10% for domestic flights since January, have already pushed some customers out of line. John Pincavage, a partner in Transportation Group Ltd., which finances aircraft equipment, predicts traffic will grow only 2.5% this year and 2% the next. The higher ticket prices will help lift operating profits some 15% this year, he says, but in 1990 they will fall 25% because of higher labor and plane rental costs. AMR, Delta, and UAL will be big winners, says Pincavage: ''They're going to the bank because of problems at Eastern. Those guys will share $2.5 billion of the $3.5 billion operating profit for the industry, while Texas Air and Pan Am will register losses.'' -- TRUCKING: Yellow light. Slower growth in tonnage will keep pressure on already slim operating margins. Tony Robertson of the Baltimore investment firm of Alex. Brown & Sons expects slightly higher revenues and flat earnings. Fuel prices were up some 5 cents a gallon in the first half of 1989. Ronald Roth, director of statistical analysis at the American Trucking Associations, fears that they may rise another 5 cents in the next 18 months. ''Each 10-cent increase adds 1% to a carrier's operating costs,'' says Roth. ''With profit margins hovering around 3%, this is equivalent to one-third of a company's profitability.'' Union wages and fringe benefits for the big less-than- truckload haulers, accounting for 10% to 15% of the industry, increased about 7% last year and 3% this year. Drivers are scarce too: The labor market is tight and new legislation makes it tougher for bad drivers to get licenses. Companies are already scrapping for traffic; consolidation in the industry, which built volume for the survivors in recent years, has largely run its course. Most analysts believe the truckers do not want to repeat the price wars of 1987, when profit margins fell to 1.4%. But, says Roth, ''it's a shippers' market, and if they start demanding lower prices it's anybody's guess. All you need is one major carrier to be upset with his volume and start discounting.'' -- MEDICAL SERVICES: Partial recovery. After several years of fever, the prognosis is brightening for health maintenance organizations and some hospitals. Occupancy rates at hospitals have leveled off around 65%, and labor costs are rising at a relatively slow 10%. Medicare payment increases are trailing costs, and the proposed federal budget would trim the growth of Medicare expenditures by $2.7 billion in fiscal 1990. But most major hospital chains can handle the pressure. Joyce Albers, an analyst with First Boston, predicts revenue for acute-care hospitals will be up 10% and earnings 5% to 10% this year and next. Specialty hospitals such as those for psychiatric care and rehabilitative medicine will also do well. Revenues for psych hospitals should jump 20% to 25% and earnings somewhat less. But ''the gap between the haves and have-nots will grow,'' says Carol McCarthy, president of the American Hospital Association. The have-nots include small public community hospitals, particularly those that mainly serve the poor, and major teaching hospitals. As a whole, community hospitals earned nothing from providing patient care in 1988. Says George Atkins, a Humana vice president: ''In the last couple of years primarily rural and urban hospitals closed. Next we will see some suburban closings.'' HMOs should see better times. Some 46% of HMO plans will be profitable this year, according to InterStudy, a health care research firm, vs. 36% last year. Says Kenneth Abramowitz of the Sanford C. Bernstein investment firm: ''They are finally charging realistic prices.'' Consolidations and closings of smaller or financially ailing plans have also strengthened the industry. -- FINANCIAL SERVICES: Mixed bag. Strapped to the Ixion's wheel of the underwriting cycle, profits for property and casualty insurers are headed down again. Last year the industry booked $13 billion in earnings from insurance operations, largely because of firmer prices and improved investment income. But the rate-cutting war is on again as insurers scramble for market share. ''Earnings are clearly headed down,'' says Denis Callaghan of Alex. Brown & Sons, a Baltimore brokerage. Callaghan expects profits from property and casualty insurance to dive to $7 billion this year and $3 billion in 1990. Life insurers, in contrast, are increasing their revenues and improving their ! margins after several years in a rut. The aging U.S. population is putting more money into life insurance, because it is one of the few legal tax shelters left. Myron Picoult of Oppenheimer & Co., expects net gains from operations to increase 12% in both 1989 and 1990. Solid savings and loans -- the ones that stuck to making home mortgages -- stand to benefit from higher interest rates on their adjustable-rate mortgages. Profits of the top 300 firms will rise nearly 17% in 1989 and 14% more in 1990, says Allan Bortel, an S&L analyst at Shearson Lehman Hutton.