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How Bad Will It Be? How Long Will It Last?
Timothy A. Lee
In late November, a group of respected economists announced what New Jersey Small Business owners have known for months Ė the U.S. economy is in a recession. The National Bureau of Economic Researchís Business Cycle Dating Committee said the economy has been in recession since March 2001.
The recession ended a ten-year economic expansion that ranks as the longest in U.S. history. According to government calculations, the recession began in March, however, Kevin Pianko, an audit partner at the Florham Park, NJ office of Richard A. Eisner and Company LLP, said by focusing on commodity prices, he began seeing signs of a looming recession as far back as the forth quarter of 2000. "If you look at energy prices, for example," Pianko said, "youíll notice a significant increase in prices 12 to 16 months prior to March 2001, and natural gas and oil are still the driving forces in our economy."
Nationally recognized market strategist, Jordan Kimmel, also backdates the recession to last year. Kimmel said, "I began to notice signs last fall when the large telecommunication companies and PC manufacturers began announcing a significant slowdown in orders and an increase in inventory."
This recession, however, is different from the others is recent history in many ways. According to Kimmel, recessions usually start with the consumer. Consumers become very active and enthusiastic and buying activity becomes heated. Then, the Federal Reserve (The Fed), fearing inflation, will step in and raise interest rates in a bid to cool the consumer and slow the economy. In this case, the recession started in industry, which only represents one-third of the economy, and spilled over to the consumer.
One element that has economists baffled is consumer spending has remained strong, jumping 2.9 percent in October. "We have not seen the fallout in new home sales and mortgage applications that usually accompany a recession," Kimmel said.
Even so, companies continue to layoff workers, 300,000 in November and nearly a million over the last three months while corporate profits continue to nosedive.
Pianko maintains that strong consumer spending is the result of drastic price-cutting fueled, by companies trying to move inventory. Pianko asserts, "You have low interest rates pushing mortgages and home sales. You have car manufacturers offering zero percent financing. You have companies, particularly retailers, slashing prices to move their merchandise. And the consumer continues to buy. So what you have is strong top line spending, but you do not have corresponding bottom line profitability."
While the committee only announced itís findings in late November, small businesses have been feeling the pinch for months as the slowing economy has resulted in a drop off in sales, revenues and profitability for companies throughout the State.
"Smaller businesses, those with fewer than 200 employees, are more at risk than
larger businesses during an economic downturn," said Kimmel. "Larger companies tend to have a more experienced management team. That experience has taught them that the market is cyclical, so they make provisions for the dips in the market, that will inevitably come, while business is good." Kimmel points out many larger companies have built up a financial cushion that is large enough for them to survive a year, maybe two years, of solid losses. Whether they lack the resources to establish such a fund or just fail to do so, many smaller businesses donít have the ability to survive a prolonged downturn. In fact, many small businesses would find it difficult to survive a quarter or two of negative results.
What really worries Pianko is, because of the length of the expansion, there are many young people who have entered the business world that have never experienced a recession in their adult lives. "Having never been through this, they might not realize the impact a recession can have on their bottom line until it actually hits them," said Pianko. "We donít know is how prepared they are or how they are going to handle to this situation."
The big question for small businesses is how long will this recession last and how severe will the downturn be.
Kimmel believes the Fed has done a fairly good job dealing with the situation. Kimmel said, "We were fortunate to have a Fed that benefited from watching Japan slip into a prolonged recession because they did not move on interest rates and liquidity issues quickly enough. The Fed was determined not to make the same mistakes."
The Fed cut interest rates an unprecedented eleven times in one year and a tremendous amount of liquidity was pumped into the market. As a result, by the time large corporations started announcing layoffs, capital spending had already begun to increase.
While he does not feel we will have a runaway economy, Kimmel believes we will pull out of this recession by the first half of 2002.
Pianko is not so optimistic. He does not think we have seen the full effect of this recession yet. He cites that unemployment rates continue to rise and personal debt is at an all time high. He also believes personal bankruptcies will rise as consumers come to realize they cannot pay their debts. "I do not see any real improvement before the middle of the third quarter 2002, maybe later," Pianko said.
In either case small business owners are going to have to dig in and ride out this latest downturn, which in all probability will last at least another two quarters.
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