Ready to Rumble?

When the U.S. economy goes into a downturn, more Americans, forced out of their old jobs, start businesses. Ultimately, these new businesses help power an economic recovery, providing jobs and putting money in the pockets of consumers. It happened during the last major economic slowdown, in the early 1990s.

Given this history, many economists were prepared for entrepreneurs to lead the country out of the economic slowdown of the early 2000s. But for a time, entrepreneurs didn't respond. In the summer of 2003, John Satagaj, president of the Small Business Legislative Council, said, "I expected us to be in an [entrepreneurial] spurt. I haven't seen it yet."

In the past six months, however, all that has changed. The U.S. economy is predicted to grow by more than 4 percent in 2004. In comparison to previous downturns, this time, many small-business owners waited for the economy to tick upward before making new investments. But now that the economy has started to rebound, small businesses have become more optimistic. A survey released in March by the Business Roundtable, a trade group, found that the number of executives planning to hire outnumbered those planning to slash jobs for the first time in a year and a half. "In the past [few] months, clients have opened their wallets," says Rob Levinson, founder of RL Strategies, a Boston-based marketing firm that works with entrepreneurial companies. And Levinson says, now that an entrepreneurial surge is beginning again, savvy businesspeople are developing strategies to take advantage of it.

Slow Start

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Unlike previous recessions, in this downturn, signs of a small-business-led recovery were slow to emerge. According to Heidi Neck, an author of the 2002 "Global Entrepreneurship Monitor (GEM)," a study funded by the Ewing Marion Kaufmann Foundation, the number of Americans planning to start new businesses decreased. And a report released by the outplacement firm Challenger, Gray & Christmas Inc. showed that the percentage of jobless managers who said they were starting new businesses dropped to an average of 6.8 percent in 2003 (down from 9.6 percent in 2002). Compare that to the 1991-92 recession, when roughly 15 percent of jobless managers started companies of their own.

There are several reasons why the surge was slow in coming. Mike Smith, former head of his own PR firm, says the bursting of the tech bubble still inhibited small-business growth in the early 2000s, as the tech crash made VCs gun shy. Fears of global terrorism and the war in Iraq also spooked many entrepreneurs, who worried these events would deter consumers. And, says Erik Pages, former policy director at the National Commission on Entrepreneurship, a group that focuses on public policy and entrepreneurship, people were more reluctant to start businesses because it was harder for them to obtain benefits—primarily health insurance—than during the recession in the early '90s.

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