Source: September 2001 Inc survey.
Recession: More Than Numbers
In ordinary usage, the R word refers to a drop in gross domestic product over two successive quarters. The National Bureau of Economic Research uses a slightly different definition: a "significant decline" in key economic indicators lasting at least six months and affecting many sectors of the economy. However you define it, only three recessions have occurred in the past 30 years. Working backward:
The 1990s. The most recent recession took place from July 1990 to March 1991 -- but don't interpret those dates too strictly. In any recession, businesses typically feel a pinch at some time before and some time after the officially recorded slowdown, and indicators such as unemployment may not peak until the economy has actually begun to recover. The immediate cause of the early '90s slowdown was, as it often is, the Federal Reserve. Fearing inflation from the 1980s boom, Alan Greenspan and his colleagues slowly tightened the screws on interest rates. Finally, the prime lending rate topped 10%, GDP began to decline, and unemployment rose (hitting 7.5% in 1992). The brief Gulf War, in early 1991, didn't help matters -- consumers and businesses held back on spending until the tension in the Middle East eased -- but neither did it provoke a sustained slump.
Why not? One reason: a huge new technology -- the personal computer and its many spin-offs -- was waiting in the wings. PCs had become wildly popular in the previous decade, yet their potential had only begun to be realized. (How many people had even heard of the Internet in 1990?) The next nine years witnessed a boom in information-technology and telecommunications investment, opening up huge opportunities for entrepreneurs and helping spark the longest economic expansion in history.
The 1980s. The double-dip recession of the early 1980s -- January to July 1980 and then July 1981 to November 1982 -- was also touched off by Fed policy. In 1979 inflation was the highest it had been since 1946, and Fed chairman Paul Volcker fought back with brutally high interest rates. You'll remember those rates if you were in a credit-sensitive industry such as real estate: the prime neared 19% in 1981. With credit virtually collapsing, the GDP plunged a full 2% in 1982, while unemployment hit nearly 10%. But the painful medicine worked. Inflation soon fell to reasonable levels, confidence returned, and the economy embarked on the 1980s expansion.
One force driving the expansion was a dramatic restructuring of large corporations. Buffeted by economic conditions and new overseas competitors, big companies slashed payrolls by the thousands. They got rid of their cafeterias, shucked their travel offices, and reduced their human-resources staffs. Manufacturers bought parts instead of making them. Service firms farmed out work they had once done themselves. All that outsourcing spelled opportunity for young growth companies -- opportunity reflected in the fact that "business services" became one of the fastest-growing sectors in the economy. A second engine of expansion: deregulation. By the early '80s the airline, trucking, telecommunications, and banking industries were all open to new entrants, and entrepreneurs jumped in.
The differences between the previous recessions and the present one are striking. Inflation now is quiescent, and unemployment is still relatively mild. The Fed never did raise interest rates very high before this recession started, and the cost of borrowing is about as low as it can get. But there's one more period worth examining because it sheds light on the aspect of a recession that may trouble us the most today: the psychological. If you're old enough, you'll remember those bleakest of modern times:
The 1970s. The official recession of the '70s lasted a full 17 months, from November 1973 to March 1975. The GDP fell a little in both 1974 and 1975. Unemployment reached 8.5%. But the numbers alone aren't the story of the decade. In 1973, incensed by U.S. support for Israel in the Yom Kippur war, Arab members of the Organization of Petroleum Exporting Countries (OPEC) declared an embargo on oil exports to America. Energy prices shot upward. Gas stations were suddenly short on supplies; panicky drivers lined up for blocks to fill up their tanks. Companies with big energy bills found themselves struggling to stay in business. The crisis gradually eased, but then a revolution in Iran in early 1979 interrupted the flow of oil from that country, bringing the gas lines back and shoving prices skyward once again. Both events and their aftereffects seemed like symbols of a new kind of war, a war that we didn't know how to fight, that we weren't sure we could win, and that could drag on for years rather than months. When the Iranian revolutionaries took U.S. embassy personnel hostage, later in 1979, the horror seemed almost predictable: Americans felt they had been held hostage most of the decade.
The psychological effects were stark. Gloomy prognosticators declared that the world was running out of oil -- and probably many other resources as well. Corporate executives even worried that the government would have to run more of the economy. "Among business leaders, fear is developing that a gathering crisis will turn the nation decisively toward socialist patterns," said U.S. News and World Report. Technically, the economy was in recovery after 1975, but the mood was anything but ebullient. Growth was sluggish. Inflation and unemployment both remained high, a phenomenon that came to be known as "stagflation." The resulting unease and uncertainty plagued businesses and consumers alike, making both groups reluctant to spend or invest. Had there been a large population of growth-oriented entrepreneurs in those days, they might have felt as perplexed about the future as today's entrepreneurs feel now.
Test of a Resilient Group
Tote up all the historical parallels and what do you get? On one side of the ledger, the economic environment is every bit as enervating as that of the '70s, particularly in regard to the uncertain threats facing the United States from abroad. Worse, no obvious engine of growth is waiting for entrepreneurial fuel, as it was in both the early '80s and the early '90s. Such factors suggest a lengthy, stubborn downturn. "I'm sure we are in a recession, probably a relatively deep and extended one," legendary investor Warren Buffett told his managers at the end of the last quarter. Many leaders of growth companies agree. Close to half of the Inc 500 CEOs who responded to our survey expect the downturn to last a year or more, and 66% expect it to be moderate or severe in intensity. (See chart below.) Given such grim prospects, political leaders may soon be debating the possibility of judicious public support for growing companies. (See " Bridging the Capital Gap.")
