Where's Our Economic Recovery? Despite economic stimuli and talk that the recession is over, some entrepreneurs and experts aren't convinced we're through the woods yet. Here's what you can expect for the rest of 2003 and beyond.

Last month, the National Bureau of Economic Research (NBER), a privateorganization that analyzes American business cycles, announced thatthe U.S. recession ended in November 2001 and that the economy isnow beginning to rebound. A rebound makes some sense: In the secondhalf of 2003, a combination of powerful stimuli will be enteringthe American economy, providing the best chance since the 9/11attacks for the nation to return to 1990s growth rates.

Yet despite the NBER report and the influx of stimuli, manyeconomists and businesspeople remain doubtful that a full recoveryis in the cards. Many entrepreneurs have thus far been unable toaddress the factors that caused the recession. As a result, mostsmall businesses have not begun hiring again. In fact, someentrepreneurs actually are preparing for the stimuli to fail andare digging in for a long economic slowdown. "I wouldn'tcall it pessimism, but there's a kind of continued edginess andfear about the future in the small-business community," saysJoel Marks, executive director of the American Small BusinessAlliance, a Washington, DC, trade group.

There is a possibility that the U.S. economy will take off inthe second half of 2003. President Bush's most recent round oftax cuts, which included some cuts of taxes on capital gains anddividends, will pump at least $60 billion into the economy in thethird quarter of the year. These cuts may boost consumer spending,which has historically been one of the main drivers, along withbusiness investment and foreign capital, of the U.S. economy.

Meanwhile, the Bush administration plans to boost militaryspending in the second half of 2003 and the first half of 2004, andnew regulations that foster greater competition in militarycontracting may allow smaller companies to compete on a more evenplaying field for these deals. The Federal Reserve has cut interestrates to their lowest point since the 1950s, and Fed Chairman AlanGreenspan has indicated that he is willing to cut even further inorder to goose the economy. And the continuing decline of the U.S.dollar against other major currencies like the euro and theyen--the greenback has dropped more than 10 percent against theeuro so far this year--will help American exporters. "Thedollar should fall significantly. It looks like it will declinemore, and that will help companies in the fall," saysChristian Weller, an economist at the Economic PolicyInstitute (EPI), a Washington, DC, think tank.

And as Edward Hudgins, Washington director of the ObjectivistCenter, a Poughkeepsie, New York, think tank, notes,trade-resistant policies that might hinder American exporters--suchas bills currently in Congress designed to shield somemanufacturers from foreign competition--probably will go nowhere."These policies always get pushed out around election time andin the wake of a recession," Hudgins says. "But theydon't normally go far."

At the same time, the Bush administration is increasing taxwrite-offs for small companies making new capital investments, atrigger that may be prompting even some cash-strapped entrepreneursto consider buying expensive new items. In a survey completed inJuly by Hewlett-Packard, nearly 50 percent of small businessesquestioned said that today is a favorable climate for smallcompanies to invest in new capital, and more than 40 percent saidthey planned to make computer technology purchases relatively soon.And last month, the SBA reported that loans to small companies rose bymore than 30 percent between October 2002 and July 2003, suggestingthat some firms are making new investments.

Some indicators suggest that a recovery is already underway.The Conference ofMayors, an organization of leaders of metropolitan areas, haspredicted that metro areas' economic growth rates will behigher in 2003 and 2004 than in 2002. The Dow Jones and the Nasdaqhave posted major gains this year, with the best-known technologystocks gaining more than 30 percent in the past four months. In arecent USA Today survey of economists, the 67 analystspolled expected the economy to grow more strongly in the secondhalf of 2003 than it did during the first half of the year.Meanwhile, in May and June retailers in key industries such aselectronics, home construction and clothing posted gains in sales,suggesting that consumer spending has remained relatively strong."If you compare America to any other country in the world, byany standard, our economy is doing reasonably well," saysHudgins.

What's Standing in the Wayof Recovery?
Yet though the economy has begun expanding again, it has not grownfast enough (it grew by only 2 percent the first half of 2003) toallow most companies to address the key factor that caused therecession--excess inventories--and return to a solid base ofprofitability. Huge state budget deficits have hindered theeconomy's growth, as states and municipalities cut spendingjust as the federal government provides tax cuts and spending.Other major economies such as Japan and Germany remain stuck inlow-growth cycles, unable to help boost American exporters. Themajority of the tax cuts passed by the White House may not helpsmall companies, Marks says, because they'll go to upper-incomeAmericans who historically save money from reduced capital gainstaxes rather than going out and spending the windfall. And asWeller notes, though the greenback has fallen against other leadingcurrencies, "there's still not enough momentum for thekind of sharp decline in the dollar that would really boost exportsand trade and allow companies to draw down inventories."

Consequently, though some entrepreneurs may be considering newcapital investments because of government incentives, economistssay that, despite the recession and reductions in business stocksand capacity, small companies still are carrying larger inventoriesand higher debt burdens than they did five years ago. "I knowalmost no small businesses that have slashed their inventoriesenough to be able to make new investments," says Marks."Everyone is still struggling, not planning for the future butjust trying to make it today. That group [the NBER] that says therecession is over--I don't know what universe they're in.They don't understand the situation on Main Street."

Unable to slash inventories and become profitable again, andaware of workers' productivity gains, most entrepreneurs do notplan to hire new workers in the near future. In the early 1990s,small companies led the recovery, becoming the first to hire newworkers and ultimately pulling the economy out of the doldrums. Buttoday, the story is different: In the same Hewlett-Packard survey,58 percent of small companies polled said now was a bad time tohire new employees. In fact, analyses by the EPI show that over thepast six months, "labor market trends have grown somewhat morenegative"--that payrolls lost more jobs between December 2002and June 2003 than they did during the previous six months. InJuly, EPI President Larry Mishel told the Financial Timesthat the employment climate is "the greatest contraction inprivate-sector employment since the Great Depression."

Some economists fear these trends are leading to longer-termunemployment problems in which many Americans simply take earlyretirement or otherwise give up looking for jobs. "As thedistribution of income widens and the economy weakens, more peopleare asking themselves whether they can traverse thesebarriers," says Andrew J. Rettenmaier, associate director ofthe PrivateEnterprise Research Center at Texas A&M University, inCollege Station. And once skilled laborers decide they can'tfind a job and leave the work force, it is difficult for Americancompanies to rebuild that intellectual capacity, Weller says,thereby limiting economic recovery. "Physical capacity likebuilding a new plant is easily recoverable, but skilled labor isnot," he says.

With entrepreneurs unable to significantly slash inventories,book profits or hire staff, they are increasingly planning forlong-term economic weakness--a situation Greenspan has dubbed"pervasive caution" on the part of American companies. Acentral part of this planning has been increasingly competing forcustomers on price, a dangerous trend that could only exacerbatethe economy's problems. "People have gotten used tooperating in a poor economic climate" and are making changesto anticipate it continuing indefinitely, Marks says. But byslashing prices in an attempt to boost sales and return toprofitability, economists warn, companies could foster nationaldeflation, in which prices for most consumer goods fall. Ashappened in Japan in the 1990s, in a deflationary cycle, consumersdon't continue opening their wallets because they expect pricesto keep dropping, firms cannot boost their profits and cutinventories, companies cannot afford to hire new workers, andincreased job and wage reductions further dent consumers,continuing the devastating cycle.

Yet despite some bleak indicators, some entrepreneurs remainhopeful that the second half of 2003 will deliver the kind ofgrowth needed to allow them to slash inventories and even beginhiring again. Some believe the Bush administration's recenttrip across the heartland, in which Cabinet members held smallmeetings to listen to the concerns of entrepreneurs, will result inmore government assistance for small companies, such as anincreased focus on high health-care costs and American pressure onChina to revalue its currency, which would make Chinese exportsmore expensive. Others have been heartened by the fact that factoryorders rose slightly last month, a sign that the manufacturingsector, long the bellwether of economic recovery, may finally berighting itself.

Joshua Kurlantzick is a writer in Washington, DC.