Recession, downturn - whatever you call it, the recent economic slowdown may be one of the most confusing in recent memory. Results of a recent Inc 500 survey suggest that even seasoned company builders are struggling to figure out what's going on.
Special Report: State of the Entrepreneurial Economy
In past recessions, growth companies have absorbed shocks to the economy. A new survey of Inc 500 CEOs suggests that might not happen this time around.
Recession, downturn -- whatever you call it, the economic slowdown of the past year may be one of the most confusing in recent memory. It didn't start for the usual reasons, and it isn't obeying customary dynamics. Particularly for growth companies, the signs and portents were mixed even prior to the attacks on September 11, and since then they've grown only murkier. Even seasoned company builders are having a tough time reading the omens -- and determining how the downturn will affect their businesses.
Take Phillip Mosely, who founded his IT company, OnSphere, in 1988 and managed it through the recession of the early 1990s. Then, says Mosely, "it seemed like there was an end in sight. It wasn't depending on whether someone was going to blow something else up or not." Not so today, he says. "Now, primarily because of the events of 9/11, there's still not a sense of when we're going to come back out."
Another source of confusion is the employment picture. Well before September, job cuts at large companies had been announced in record numbers. Add in the postattack layoffs, and the total number of job cuts announced through the third quarter of this year came to nearly 1.4 million, more than twice as many as in any full year in the past decade. (See chart, below.)
Announced Job Cuts, 1989-2001
A Shock to the System?
JOB LOSSES MULTIPLY: By the end of the third quarter, U.S. companies had announced record job cuts -- more than twice as many as those announced in any full year in the past decade.
* Through August 31.
Source: Challenger, Gray and Christmas. |
Cutbacks of that magnitude ripple through the economy, sapping confidence and ultimately eating into spending. The unemployment rate, however -- at near-historic lows for the past few years -- has been creeping upward only slowly and is still well below the levels traditionally associated with a recession. That suggests either that most of the big-company cuts haven't gone into effect yet or that entrepreneurial businesses are picking up the slack.
The latter hypothesis fits with past experience. "Keep in mind that in the early 1980s [recession] and again in '91, the small-company share of job generation was 100%," says David Birch, president of Cognetics, perhaps the world's leading authority on small-business demographics. "This population of small growing companies acts as a shock absorber for the economy as a whole." The trouble is, right now the entrepreneurial sector may not be exhibiting the resilience you'd expect. Indeed, the signs from growth companies are as perplexing as those coming from any other sector. For example:
- Birch maintains a database of what he calls "gazelles," companies that have grown at least 20% annually for four straight years. In 2001 the population of gazelles shrank substantially, dropping 12%. The drop can't be ascribed to the dot-com collapse: Internet companies as a group were never more than a blip in a database comprising more than 300,000 businesses. Says Birch: this 12% drop is "very significant."
- Inc recently conducted an online survey of the last two "classes" of Inc 500 CEOs, who constitute a sizable chunk of the people who own and run the fastest-growing privately held companies in America. At least one statistic from the survey bears out Birch's view: 39% of respondents reported flat or declining sales in 2001, meaning that they were no longer running growth companies. More than one in six respondents even acknowledged that they had "serious concerns" about the viability of their companies. (See chart below.) And yet, on the plus side, 61% reported growth this year (see chart below), and even after September 11, 69% were forecasting growth for next year.
- PricewaterhouseCoopers has tracked the attitudes and plans of 400-plus CEOs of growing companies for the past decade. As far back as the fourth quarter of last year, the CEOs had begun to cut back on their capital-investment and hiring plans, and they scaled back further after September 11. However, even after the attacks, 72% were projecting double-digit growth for the next 12 months, and more than half were planning to hire.
So nobody knows quite what to expect from this recession, particularly since it isn't following any recent scripts.
Falling Off the Fast-Growth Track
SLOWING SALES: Even before September 11, more than a third of Inc 500 CEOs were experiencing flat or declining sales. (NOTE: Figures compare sales from January through August with those for the same period in 2000.)
How Growth Companies' Sales
Fared in the First Three Quarters of 2001
|
Percentage of respondents |
| Sales up in '01 vs. '00 |
61% |
| Sales down in '01 vs. '00 |
33% |
| Sales flat |
6% | Source: October 2001 Inc survey of 764 CEOs whose companies
had made the Inc 500 in 1999 and 2000; Inc received 202 complete responses.
Who's Worried?
CONFIDENCE WANING: 18% of Inc 500 CEOs surveyed this past fall said they had "serious concerns" about the viability of their companies. Historically, Inc 500 companies have an annual failure rate of approximately 2%.
Do you have serious concerns about the viability of your company?
No: 77%
Yes: 18%
Don't know: 5%
|
