Coming Down

Recession or no recession, business as usual won't do in 2001.

As this article goes to press in winter, the talk of the nation for the past two months has been about a U.S. economic slowdown. Journalists are trotting out reams of data to detail plunging corporate profits and a bear stock market. And some indicators, undeniably, look bad:

  • The Commerce Department showed growth slowing to an annual rate of 1.4 percent in the fourth quarter from the third quarter's 2.2 percent and the second quarter's 5.6 percent.
  • The Conference Board saw its widely followed Consumer Confidence Index fall to its lowest point in more than four months: 114.14 in January from 128.6 in December.
  • OPEC seems determined to keep oil at or above $25 per barrel, while natural gas prices have risen astronomically.
  • Such stalwarts of the New Economy as Intel are issuing profit warnings.
  • Fed chairman Alan Greenspan reported to Congress less-than-encouraging news on January 25: "As far as we can judge, we have had a very dramatic slowing down, and indeed we are probably very close to zero [growth] at this particular moment."

Judging by the statistics, it looks like Morgan Stanley Dean Witter chief economist Stephen Roach may have been right when he predicted a recession for 2001 in a January 8 report.

But...maybe not. The majority of economists think we're headed for slower growth-not a recession. The Wall Street Journal's annual forecasting survey asked 54 economists for predictions. Consensus has growth slowing to 2 percent in the first quarter before accelerating to 2.9 percent at year's close. Unemployment should also remain low.

"The economy has too much momentum to be in a recession in 2001," says , chief economist at the National Federation of Independent Business, adding that federal, state and local governments spending their budget surpluses will be an added buffer in the coming year.

Another factor to remember is the breadth of the American economy. "Over the past 20 years, not every sector has gone into recession at the same time," says William B. Gartner, the Henry W. Simonsen Chair in Entrepreneurship at the University of Southern California in Los Angeles. "There's not just one industry cycle."

Still, it's hard not to get skittish-especially if you've never been through this before. At press time, we were closing on the 10th straight year of economic boom-plenty of time for many firms to mature without ever feeling the nasty backside of the economy's hand.

And, for fast-growing companies, 2 to 3 percent growth can feel like a recession, says , principal and founder of capital market advisory service The Econoclast Inc. and participant in the Blue Chip Economic Indicators survey. With lower inflation expected in 2001, pricing pressure will be tight. At the same time, customers will be squeezing you to cut prices further as slow growth limits their expenditures.

"We have a slowdown in expectations but not in spending," says Dunkelberg. "It's a question of how fast or whether these expectations get translated into spending."

Canaries In the Coal Mine

What data gives you the best indication of where the economy is headed? Here's what economists and entrepreneurs say:

"Watch job creation, " says the National Federation of Independent Business' Bill Dunkelberg. "If that turns negative, that's a clue we've got weakness."

David Friend of eYak keeps an eye on the annual rate of IPOs. A slowdown there means VCs are funding fewer startups, which reduces the number of fast-growth firms that fueled development in the '90s.

Economist Michael Cosgrove suggests tracking the value of the U.S. dollar against foreign currency. If the greenback remains strong, he expects more easings by the Federal Reserve-which should prime the economy. "But should the dollar weaken significantly," he says, "the easing may be off, and we could have an extended slowdown into 2002."

Dunkelberg also watches another economic barometer. "We could see a sharp curtailing of capital spending, especially since it's discretionary," he says. If so, that's a vote of no confidence by your fellow business owners-and a good indication to take things slow.

Finally, Houston financial advisor Ronald P. Schutz has a folksier approach. "I use the weight of the paper after I pull the classifieds out," he says. "When the newspaper gets light, retailers aren't spending money on ads."

The purveyors of financial information know that scenario all too well.

Page 1 2 3 4 5 Next »

Like this article? Get this issue right now on iPad, Nook or Kindle Fire.

This article was originally published in the April 2001 print edition of Entrepreneur with the headline: Coming Down.

Loading the player ...

3 Keys to Getting Better, More Restful Sleep

Ads by Google

Share Your Thoughts

Connect with Entrepreneur

Most Shared Stories