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Shuttered Businesses Everywhere And The Carnage Isn't Over

Economic Trends


The economy may have posted modest growth since the first quarter of last year, but the mortality rate of U.S. businesses continues to soar. Dun & Bradstreet Corp. reports that a record 87,266 businesses went belly-up in 1991, 44% more than in 1990. At the same time, the dollar liabilities associated with business failures skyrocketed, from $55.5 billion in 1990 to $108.8 billion--nearly 2% of gross domestic product.

"The recession, coupled with the vast amount of debt accumulated in the 1980s," says D&B economist Joseph Duncan, "has taken its toll across the U.S." Duncan notes that business failures increased in every region of the country last year and in every major U.S. industry, from services to manufacturing.

The surge in failures is ominous for several reasons. Because new businesses have a high mortality rate, rising failures in the past have often reflected a healthy pickup in new business formations. In recent years, however, new business incorporations have been declining, indicating that the latest failure wave is mostly a hardship phenomenon.

The implications for employment gains are particularly grim. Most business failures involve relatively small operations--61% of last year's failures accounted for less than 1% of the total $108 billion in liabilities that failing businesses left in their wake. And small business not only employs at least half of the nation's private work force but also accounts for the vast majority of employment increases. Thus, the high failure rate, combined with the downturn in new business formation, casts a pall over the near-term job outlook.

As Duncan sees it, the business mortality rate is unlikely to fall for some months. For one thing, the high level of liabilities generated by last year's failures almost guarantees another round of fatalities, as creditors and suppliers of businesses that expired find they lack the wherewithal to survive. And business becomes more difficult as companies tighten credit terms to avoid getting burned by troubled customers.

From this perspective, it's hardly a surprise that failures so far in 1992 are running about 25% above last year's pace. "Even if a recovery takes hold in the next few months," says Duncan, "a lot of businesses are likely to find that the pickup is too little and too late."GENE KORETZ

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