There was a hungry lion guarding the bridge to the 21st Century.

The stock market is roaring and, one month into the new year, our readers feel very optimistic about 2004. Are we in the midst of solid economic recovery? Is the worst past? Will yet another shoe—or shoe factory—fall?

Some of us feel like a person mugged on a dark night. We’re back home now in familiar surroundings, but we still have the feeling that the mugger is standing outside our door.

To many of our readers, the last three years were business as usual. Law firms such as environmental law specialists, Beveridge Diamond, did well, experiencing no downturn in the last three years. Homebuilding, with unprecedented low interests rates, boomed. Sherman Burrows, President and CEO of Burrows Manufacturing, builders of custom cabinets for large builders in Central Texas, has grown his business by double-digits each year of the recession.

To those involved in a great cross-section of the American economy, however, the much-touted bridge to the 21st-Century was a plunge into a seemingly bottomless chasm. Hopefully we are coming out on the other side, and now it’s time to take a look backwards and take a look at the way ahead.

First the look back.

Carol Kallendorf, Ph.D.

Where Were You on New Year’s Eve?

Where were you on New Year’s Eve, December 31, 1999?

I was at a very nice New Year’s party. I walked through the spacious Spanish style house of a friend—a circular arrangement of rooms around an open courtyard—and as I made my way past food tables and fully stocked bars I experienced something only a few people experience in the annals of human history.

It was the eve of the beginning of a New Century and New I thought little about the rare alignment of dates and saw no cosmic signs in the sky of streaking asteroids announcing either doom or the announcement of a New Age. I’d heard pundits and politicians speaking of the “Bridge to the 21 Century,” but I had thought that phrase to be so much political rhetoric. It was pretty abstract for my mind. The date would change and the world would go on. There was no need to put on white robes and climb a mountain to wait for anything.

What about you? What was on your mind?

What I really had on my mind was Y2K. It was that seemingly quaint notion that a programming flaw of decades earlier would crash all of the computers of the world. The lifeless barcode readers would be left without even the ability to scan a can of Spam. I had even bought a few extra bottles of water and canned goods to protect us, about as effective as children crawling under school desks in the 50s to save themselves from the blast of an atomic bomb.

I woke up the next morning to the news that Y2K was almost as mythical as late-night radio talk show host Art Bell’s Planet X. It’s almost always true that the real reason not to worry is that what we worry about is almost never the worst that befalls us. It’s almost always true that what you never believed could happen comes out of nowhere to call from within us what we never dreamed we’d have to give.

The Crash of 2000

We felt like Tarzan, Jane, Boy, and Cheeta walking across a chasm on a single log.

The bridge to the 21st Century was one of those flimsy, log ones in an ancient Tarzan movie. When it suddenly breaks, it leaves the main characters (in this case, us), dangling like a stick in the wind.

You hold on for dear life, you look down, but the chasm is so deep you can’t even see the bottom.

I normally don’t get hunches about what’s coming next, but in late 2000 I was as sure that we were in for an economic storm as if I’d seen Texas funnel clouds off in the distance and known there was going to be a tornado.

We received some rather substantial checks for large projects that we completed in 2000 from several of our many high tech clients. I told everyone in our company that we would conserve this revenue as if it were our last, and it seemed it almost was. I’d seen an old movie about a sailing ship where the captain orders everything thrown overboard to stay afloat and that was my job for the next several months. We slashed and cut everything we could.

Don’t Blame the Dot.Commers—They May Not Have Been Smart, but They Weren’t to Blame

Analysts look back and like to blame the excesses on the dot.com phenomenon. They weren’t to blame . . . we were. We forgot something important. What goes up comes down.

In the midst of the downturn, I was at the gym and another small business owner turned to me and said, “You know, it makes me mad. I wish people remembered that the economy is cyclical—especially that I remembered!” This downturn was worse than the two others I’d experienced, but the difference was one of degree, not kind.

The Dot.com phenomenon, which often gets the blame for the downturn, was nothing more than a tiny blip on the screen of economic disaster. The true explanation, from the point of view of our clients, is that they found themselves with warehouses full of inventory that customers urged to build and all the sudden the new orders stopped and customers started backing out of existing deals. They also found themselves with bloated budgets and out-of-control spending. Sales and earnings plummeted and stocks, which were vastly over-valued, took a precipitous, perpendicular fall, like Wiley Coyote, straight down to the canyon floor.

The True Impact of 9/11

What was the true impact of 9/11 on the economy? Not much.

We had already lost much of our business before 9/11, so we were like the sharecroppers of the 30s who had no idea there was a depression going on—we thought that was just the way it was. A lot of our readers report the same experience. Like them, we reacted aggressively to the crash: we wrote and rewrote our marketing plan and we got relentlessly on the telephone. We did it with great enthusiasm and resolve—but without much in the way of results. Mike Barr, Senior Vice President of Sales for Comair Rotron, in San Diego, felt like he was the last soldier trying to hold off an invading army. He was successful in stemming the tide, and it wasn’t fun. Mike has a passion for making the sale, but now he found himself in arm-to-arm combat with his customers, all too often wanting to back out of product commitments.

So while some industries were devastated by 9/11, the fundamental reasons for the economic downturn are for the most part separate from this monumental national tragedy.

It’s important to realize this because there will in all likelihood be other acts of terrorism, domestically and internationally. In the U.S., we are tough enough to run an economy in the midst of war, even this new kind of war. We need the spirit of Rosy the Rivetor who was a symbol of the heroic woman who energized the wartime economy of World War II. Americans are smart and resolute enough to continue to thrive economically.

Like all of you, I’ll never forget where I was on 9/11. We all stood around in the break room and watched hate-based destruction we’d never seen so dramatically in this country. We had a couple of programs scheduled in the Washington, DC. and New York areas which were cancelled, but eventually rebooked. We knew of a few people who refused to fly after 9/11, but most of our clients had already deeply curtailed business travel.

Aside from tourism and elective travel, which were monumentally impacted by 9/11, the downturn was part of the economic cycle, intensified by the startling technology of the Internet and the other communication technologies that changed the world as dramatically as the invention of the wheel. Technology passed through a critical developmental stage. It took a breather and so did the economy. The economy was just so far up that it had a long, long way to fall.

Most businesses are doing better. What will the future look like?

Here are some questions we need to answer.

1. Are the fundamentals of the economy getting better? Yes, earnings reports have driven the Dow above 10,000 during the last few weeks. Companies have done a lot of important work during the last three years.
   
   The story is not just in the reduction in headcount, but in the improvement in business processes that allows organizations to do more with less. Technology is also driving more efficiencies. Sales are improving or at least slogging along at a rate that produces enough cash to actually showing up in corporate bank accounts. Nobody within organizations wants to spend money, and positive cash flow is finally hitting the balance sheets.
   
   Whether this trend represents a return to the fundamentals of conservative management or whether we’re ramping up for a new round of hype, complete with smoke and mirrors, remains to be seen. We are all tired of this business downturn and corporate boards, executives, and employees want results in terms of rising stock prices and increasing personal wealth. We want to wash the bad taste of the last three years out of our mouths and make up for lost time.
   
   Will this result in the kinds of imprudent risk taking of the 90s? It is critical that we stick to the fundamentals during the next two years--to improving products, processes and services, increasing sales, holding down the growth of the organization, making pennies squeal, paying down debt, and living within our corporate and personal means.
   
   

   Will we build the economy on good business principles or greed?

2. Will the US “win the gold” in the global competition during the next two years? It will all be determined by invention and innovation.
   
   In the US, we are all worried about jobs that used to be considered relatively secure—accounting, customer service, sales support, and on and on endlessly—going to other parts of the globe. With current and emerging technology, which ironically was largely conceived and developed in the US, there is virtually no job done here today that cannot be gone tomorrow. It’s still shocking, but true, and vitally important to remember.
   
   Jobs will make a strong recovery during the next year. There is good evidence that the U.S. will continue to set the standard of competition at the world level. It’s valuable to remember that the jobs are getting shipped out of this country. When companies in New Delhi are looking for telephone operators in the U.S. we’ll know that the balance of economic power has completely shifted. This can happen and the real endgame, for the US economy at any rate, is to keep it from happening. But as long as invention and innovation have their home here, it won’t.
   
   Personal employability is a very different issue and still very volatile. Many elements of the old job skill-set are dead, and people will need new skill-sets. People who are unemployed and sitting around the house waiting for the recovery may be sadly disappointed. It’s not enough to hustle around and get the resumes out, to submit your resume to the job search engines or even to network. People looking for work must use the time well in training and mastering new skills. Even if they can’t afford college or technical school training, working as a volunteer for non-profit organizations is an important way to grow and develop skills while contributing to the community.
   
   The only serious competition for economic dominance during the last 40 years has been Japan. Yet ultimately Japan has not prevailed over American invention and innovation and is still Japan is still languishing in a wrenching, decade-long recession with no end in sight. Gone are the business guru books touting Japanese management as the standard for the world.
   
   The other day, I heard an Indian executive decrying the poor educational standards in the U.S., touting India as the new winner in global competition. Will that prediction prove true? Innovation and invention are the only factors that ever determine the winner in world competition. Where it resides and how it is dispersed across the globe will determine where the companies are created that lead the creation of jobs and wealth.
   
   

   Andrew Fastow accepted an unprecedented 10-year prison term in a plea bargain arrangement in exchange for his cooperation in incriminating other Enron officials.

3. Will corporate and governmental ethics sink the economy? At the moment of this writing, opening arguments are being heard in the Martha Stewart trial. Andrew and Lee Fastow, of Enron fame (or infamy), are going to jail and may lead the Justice Department to the even bigger fish of Ken Lay and Jeff Skilling.
   
   But will corporations see it as to their advantage to run their companies for the stockholders? The tide is running against reform. We are in favor of corporations and we believe that they hold the key to the future for both consumers and employees. We have corporate clients who have their priorities in order: the customer, the stockholder, the employee, and the larger community.
   
   Yet the graft and corruption of an unprecedented era of corporate excesses is still being unearthed. Sure, we’ll see a much more conservative approach among accounting and audit firms and greater due diligence and controls in the investment community. But that will be largely because to do otherwise represents a huge danger to their own businesses. I’m not at all sure we’re seeing a rush toward reform in the boardroom. The SEC is limited in its resources and its will to police corporations. The jury is still out on the New York Stock Exchange. The will to reform will be in inverse proportion to how the market is doing. If the market is doing well, the will to reform will weaken.
   
   

BizWatch’s Take on the Economy

BizWatch’s take on the economy is upbeat for 2004. The stock market has strong momentum and sales reported by readers for their businesses show strong trends for solid profit.

Job creation will improve somewhat, but the trend toward outsourcing ever-increasingly-sophisticated business processes to global locations outside of the U.S. will increase. Real estate will slow as mortgage rates increase and a glut of homebuilding will result in a “choppy” to “rough” landing for that industry. Office lease space occupancy will increase, albeit very slowly, as the market tries to absorb a large inventory of presently unoccupied existing space, with a large amount of new space coming on line this year from previously stalled projects.

The economy will likely slow in the first quarter of 2005, after the presidential elections in November 2004. During the first quarter—if not before--the Federal Reserve will raise interest rates, which will be followed by a series of rate increases throughout ’05 and ’06. Not all of the adjustments have been made in overpriced stock values, and these will continue throughout ’05, and yes, there will be more cases of corporations with “cooked books” shaking investor confidence. Consumer confidence will remain strong and sales taxes will continue to increase for local governments, but consumers will remain very wary of discretionary spending and will demand bargains before opening purse or pocketbook.

The biggest wildcard in the economy for both improved numbers and job creation are time, labor saving, and life enhancement technologies for businesses and individual consumers. The consumer is unlikely to invest heavily in cell phones that are enhanced with photo and video capabilities. The growth of the economy long term will depend on innovations—lifechanging innovations that are as strong as email, cell phones, and the Internet. There must be innovations in biotechnology that extend life and health, successfully address issues like obesity, and tap into people’s need to look and feel young.

These are the types of innovations that will motivate people to create wealth and to enjoy a truly better life. These are the types of innovations that will bring prosperity to the globe.