Hopes for recovery fade as talk switches from downturn to recession

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Leading economists predict the U.S. economy, already faltering before the Sept. 11 terrorist attacks, will enter a recession by the end of the year, quashing hopes for a turnaround in the months ahead.

A broad survey of executives in major b-to-b industries, including advertising, consulting and software, revealed pessimism regarding short-term business prospects. In a rare optimistic note, b-to-b exchange executives said rampant corporate cost-cutting could prove a boon for their businesses.

Diane Swonk, chief economist at Bank One Corp., said the terrorist attacks have cast a great deal of uncertainty on an already weak economy, prompting businesses to reel in spending even further and adopt a wait-and-see attitude.

"Unfortunately, we do know a lot about disasters and how they play out in the U.S., but we have nothing on something like this," Swonk said. "This is one of the few kinds of events that can scare people into not spending."

Technicalities irrelevant

Ken Goldstein, an economist with The Conference Board, said that whether the economy technically enters a recession—defined as two consecutive quarters of declining economic activity—is irrelevant because businesses are already making decisions as if there is one.

"When it feels like a recession, executives cut back wherever they can—not only in terms of what they’re saying, but in the decisions they’re making; and right now they’re responding as if it’s a recession, and that’s what matters," said Goldstein, whose New York-based research group issues a monthly report on consumer confidence.

Federal officials are working to ward off a deeper slowdown. The Federal Reserve has cut interest rates further, and Congress approved a $15 billion airline bailout.

"[The terrorist attacks] totally altered the fiscal resolve of this country," said Jim Paulsen, chief investment officer at Wells Capital Management. He said the government’s efforts could lead to a turnaround six months from now and a return to healthy growth rates by 2003.

Before any recovery happens, however, key b-to-b industries will almost certainly see their markets deteriorate further.

For b-to-b advertising, which was already in a slump because of the down economy, the outlook is especially gloomy.

The Jack Myers Report on Sept. 19 issued a revised forecast for the advertising economy, projecting a 7.4% decline in ad revenue for next year, compared with an August forecast of a 1.7% decline. Myers expects a 6.6% decline for the remainder of this year. The outlook for b-to-b is even worse, with Myers revising its forecast from an 11% revenue gain for the remainder of this year to a 12% decline.

Ad agency executives declined to comment on projections and revisions, although most agreed the outlook is bad, particularly if the U.S. opts for a major retaliation or more terrorist attacks occur.

The software outlook is also bleak, at least in the short term. Software developers’ stocks have been hit hard since Merrill Lynch & Co. and U.S. Bancorp Piper Jaffray Inc. downgraded their outlooks for the industry in the weeks following the attacks.

B-to-b consultants, both the Big 5 and smaller firms, have seen their business dwindle since the attacks, which came at a time when some industry watchers were saying a recovery was already under way.

"August bloomed like a rose, but we now think the next couple of months will probably be even worse than we ever experienced beforehand," said Dean McMann, CEO of The Ransford Group. "It won’t cause massive layoffs, but it will continue to hurt profitability."

The attacks are expected to hamper consultants’ marketing efforts. "There’s been a total retrenchment of marketing budgets and plans," said Allan Steinmetz, CEO of Inward Strategic Consulting Inc. "Procrastination is our biggest enemy now."

E-hub opportunities

B-to-b trading exchanges, which were generally in the doldrums before the attacks, see broad cost-cutting across many industries as an opportunity.

Andrew Watson, president of b-to-b trading exchange specialist CoreHarbor Inc., Atlanta, said his company held international Internet auctions on Sept. 13. "After much deliberation, our clients decided to hold a series of auctions,’’ Watson said. "Network congestion made the Web nearly unusable on Sept. 11, but by Thursday evening traffic was light enough to go forward with three different auctions."

CoreHarbor does not disclose the industries it serves, citing competitive concerns. Referring to the Sept. 13 auctions, Watson said, "Sellers and buyers were pleased with participation, which was exactly as expected.’’

Dan Jankowski, VP-global communications for auto industry e-hub Covisint L.L.C., Southfield, Mich., said trading exchanges were used in new ways as a result of the attacks. For example, Covisint call center representatives in Florida helped to locate workers of international companies currently in the U.S. and to assist them with travel arrangements.

The Covisint marketplace remained open through the crisis, Jankowski said."No system is totally secure, but ours is as secure as the latest technology,’’ he said. "We’ve worked really hard and done a lot of testing. We continue to do testing, including employment of ethical hackers. And, we’ve stepped up security in our physical server farms and employee facilities.’’

Exchanges, like companies in other industries, are unlikely to play up their communication capabilities during wartime for fear of appearing to be profiteers. Many exchanges did alter marketing immediately after the attacks.

For example, many hubs use imagery of tall buildings to reflect status. That’s changing. ChemConnect Inc. had displayed its San Francisco high-rise in marketing collateral. In the week after the attack, the image was stripped out in favor of factory settings, photos of raw materials and a more personal touch, said Michele Hincks, VP-marketing.

Despite the preponderance of gloom, some economists say the current economic troubles could be setting the stage for better times.

"We are increasing spending on defense, bailing out the airline industry and reducing taxes," Bank One’s Swonk said. "The security industry is going to boom. We are a country that rebuilds, and we will fortify."

Reporters John Evan Frook, Kate Maddox and Matthew Schwartz contributed to this report.

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