Are We Headed for Another Recession?

As all these signs of economic weakness build, small companies have the most to lose. Thus far, small firms have largely been shut out of contracts for post-war reconstruction in Iraq, though the Bush administration has promised to share the wealth. And according to Marks, many small companies do not possess the kind of cash reserves to deal with another prolonged period of economic downturn, since banks have become more willing to turn away small clients than they have larger companies. "Small companies have spent down much of their cash already, in the previous recession, and they didn't have time to build it up again," Marks says. "There's numbness out there in the small-business community, wondering whether they can hold on to the cash they have and numbed by each economic shock."

Lubrano agrees. "I look at competitors in the field, and I see many of them are going bankrupt," he says.

Meanwhile, small companies rarely have the capital needed to create the redundant, alternative supply chain networks that can allow goods to bypass world hotspots and generally avoid logistical problems. And owners of small companies often are ill-prepared to deal with the effects of continued anxiety and uncertainty on their workers, since few have the kind of dedicated in-house counseling services large companies employ.

Content Continues Below

Small companies also usually are more reliant on obtaining business from other entrepreneurs. "Unlike bigger companies, small firms usually depend on getting paid by a large number of small clients, many of whom can't pay now," says Marks. "Small companies can't extend them the kind of credit they need to last until an upturn that big corporations could."

Always a Silver Lining
But not all signs of the economic future are negative. In the immediate aftermath of American troops arriving in Baghdad, stock markets, which can be leading indicators of economic expansion, posted stronger gains than they had since September 11. What's more, since the beginning of the Iraq war, the price of oil has fallen by more than 25 percent. A decrease in the value of the dollar actually could help American entrepreneurs, as it would make them more competitive with companies from the developing world.

And despite high levels of debt, American consumers often prove willing to keep shopping. Corporate credit became slightly easier to obtain in March. The fact that companies have spent so little over the past three years ultimately will leave them with no option other than to increase business spending. Last week, Federal Reserve Board Chairman Alan Greenspan told Congress the economy is poised for growth even without further tax cuts--though the Bush administration continues to push for a $550 billion, 10-year tax-cut plan that may or may not stimulate the economy. (In February, a group of 10 Nobel Prize-winning economists concluded that the tax cuts would not have a significant short-term stimulus effect--some leading economists worry that further tax cuts could exacerbate federal and state deficits.)

Perhaps most important, small companies have internalized lessons from the 2000-2001 recession to prepare themselves for more economic turbulence. "Small companies that are around now are leaner than they were two years ago, and they've learned how to cut fat or adjust in other ways--merging with competitors, going into niche markets, renegotiating their contracts, conserving cash," says Marks. "Three years ago, two guys and an idea could raise capital; today those guys are living in their parents' basements."

"If you haven't already prepared for economic tough times, either by cutting all extraneous things or moving into niche markets where you can survive a downturn," says Lubrano, "after all we've been through the last few years, you have yourself to blame."

  Page   1   |   2