American Business Is Losing Its Fear Of FailingGene Koretz
Businesspeople blow hot and cold about the economic outlook, but if you really want to know how they feel, watch what entrepreneurs and companies do--not what they say. And what they're doing these days, says economist Maury N. Harris of PaineWebber Inc., points to "rising confidence."
Second-quarter earnings were far better than expected, says Harris, and capital spending is roaring ahead--as June's big jump in nondefense capital-goods orders and last quarter's 10% growth pace in business investment attest. More important, investment at the margin, in new enterprises, is taking off.
The Commerce Dept.'s index of net business formation, classified as a leading economic indicator, has been rising sharply this year and at last count was at its highest level since 1980. Contributing to this entrepreneurial surge, observes Harris, are the freeing up of managerial talent by corporate downsizing, greater credit availability, and a pronounced decline in business failures.
The drop in businesses closing their doors is particularly impressive. According to Dun & Bradstreet Corp., just 36,775 businesses failed in the first six months of 1994--down 20% from last year and the lowest total for a six-month period since the last half of 1990 (chart).
This improvement occurred in all business sectors, and drops of at least 25% were posted by major industries such as mining, agriculture, manufacturing, construction, finance, insurance, and real estate. Failures were also down significantly in all regions of the nation, including the Northeast and California.
What's more, the dollar value of liabilities plunged 46%, from $24 billion in the first half of last year to just $13 billion. Indeed, average liabilities left per failure came in at just $350,000, the smallest amount since the 1970s.
Such numbers hearten entrepreneurs and bank loan officers. "It's significant," says Harris, "that surveys indicate that banks are continuing to ease their lending standards for small business in spite of rising interest rates."