The Post-WTC Economy: How Long A Slump? The fallout is severe, but there are signs that entrepreneurs may be more resilient than the rest of the business community.
By Beth Kwon With additional reporting by Jennifer Keeney, Maccabee Montandon, Marcia Pledger, Sasha Smith, Risha Stern, and Sylvia Tiersten

(FORTUNE Small Business) – At the beginning of September, with the economy showing signs of weakness, Paul Neuman, founder of Neuman & Bogdonoff caterers in Manhattan, was bracing for a tough winter. No big deal. "We have a business that doesn't skyrocket, and it doesn't fall down," says Neuman. In business for 20 years, he was relying on his loyal clientele of conference centers and law firms to see him through the holiday season, which accounts for up to a quarter of his $6 million in annual revenue. Business was slightly up from last year, and he expected September to be a good month, despite any real or perceived economic woes. On Sept. 7, he'd even received an unexpected bonus: a last-minute order for 650 pounds of rugelach, placed by a local candidate running for office in the city's fall primary.

Then came the Sept. 11 terrorist assault on the World Trade Center and the Pentagon. All of the previous layoffs at companies ranging from Lucent to Cisco suddenly became a real problem for small business owners like Neuman, and doubt began to sink in. As we reported in our October issue (which went to press before the terrorist attacks), small businesses were proving their resilience. They were coping well, and confidence was running high. A late-summer survey by the National Federation of Independent Business even found that 25% of small companies expected the economy to improve in six months. Now those same businesses are bracing for the certain financial fallout heading their way. For caterers like Neuman in New York (who lost $130,000 in orders immediately after the blasts), restaurateurs in San Diego, garment manufacturers in Miami, travel agents in Detroit, and nearly every other kind of company in every American city, this will probably be one mean downturn.

Exactly how nasty was unclear as we went to press in late September. Even in normal times, it has become a cliche in the journalism business--just watch CNBC for ten minutes or so--to say that no one knows for sure in what direction the economy or the markets will go. But throw in the prospects of military retaliation for the Sept. 11 attacks, and you've got one big muddle. What we can tell you is that the developing picture isn't pretty. As most everyone already knows, many large companies have downgraded their earnings estimates and are cutting back sharply; the airlines have announced massive layoffs (five companies alone accounted for 100,000 lost jobs); and not surprisingly, consumer confidence is eroding. The National Retail Federation nearly halved its fourth-quarter growth estimates, from 4% growth to as little as 2.2%. The ripple effect has already touched small businesses everywhere (See "Hard Times in the Heartland," page 57, which shows the long-term impact of a big company's layoffs on one town's small business community.)

Shortly after the terrorist attack, we talked with dozens of small businesses nationwide to gauge their mood, the condition of their companies, and how they felt about the future heading into the new year.

Many were like Amira Bajoka and Irene Khin Wong. Bajoka runs a 14-year-old company, Rena Travel, just outside Detroit. Well before the WTC and Pentagon attacks, she was already feeling the crunch: Airlines had cut back on commissions, and corporate clients were cutting back on travel budgets. To compensate, she'd carved out what she hoped would be a recession-resistant niche: selling luxury tours to wealthy clients, who are typically slower to feel the pinch of a tightening economy. So much for that strategy. "Some people are calling to check fares," she says. But "people are depressed and don't feel like traveling." Wong's business isn't reliant on tourists, but her upscale New York catering company, Saffron 59, is also being affected by the city's somber state. In September she was confronted by a raft of cancellations that could cost her about $70,000. It's a big loss, but one that she's able to manage at the moment, thanks to profits from this year's strong wedding season. How long those profits will buffet her current losses, she's not sure.

Marilee Latham of Las Vegas has also learned that serving upscale customers isn't going to save her in the short run. Her two-year-old company, Amandari, which sells pricey antiques, was on track to top the $3.6 million in sales she posted last year. But in the weeks following Sept. 11, foot traffic into her store was down 75%. Stuck with a substantial amount of inventory, Latham's doing what she can to move stock. Among her tactics: a 50% liquidation sale on some items, and a free clinic on feng shui, the ancient Chinese art of interior design. That, she hopes, will somehow boost holiday sales. "By December things should turn around," she says optimistically, "but it will all depend on whether or not there's a war."

Like Latham, Trey Brady, the owner of the Juke Joint Cafe in San Diego, saw business disappear almost instantaneously. Brady, who says nearly 30% of his $1-million-a-year revenues comes from tourism, saw his normally packed Saturday night crowd drop by half in the week following the attacks, and he expects revenues to be down for the next few months, if not longer. He's trying to drum up business by wooing concierges from San Diego's hotels--hoping they'll send whatever customers they have to his jazz club. But Brady isn't too cheery about his prospects "if this thing drags on."

In manufacturing, some companies are in real danger of losing business as they head into their busiest season. Miami's Salo Grosfeld runs J.R. United Industries, the towel and bathrobe maker his father established in 1968, seven years after leaving Castro's Cuba. For Grosfeld, the fourth quarter has always been crucial. That's when he sells 70% of his robes to department stores like Macy's. Even before Sept. 11, he expected revenues to be flat. So to compensate, he'd eliminated his overtime budget. It also helped, pre-WTC, that he used low-cost subcontractors in over 30 countries, including Pakistan. But that asset has become a liability; overseas shipments into the U.S. are heavily screened by customs agents, which now delays orders three days or more. Shortly after the attacks, Karla Winfrey worried she may have to scrap a part of her new product line altogether. Her online store, Colored Christmas, which specializes in gifts for the African-American market, was about to expand its offerings, largely with items manufactured abroad. On Sept. 11 she was on her way to the World Trade Center to pick up paperwork that Customs needed before it would release $15,000 of her new merchandise. But when the towers collapsed, the original documents she needed were lost. "I am in the middle of a nightmare," says Winfrey.

By the end of September, Winfrey, Latham, and their peers got more bad news. The Conference Board's consumer confidence index sank to 97.6, down from 114 in August. It was the largest one-month point drop since October 1990, during the Gulf war.

So now what? Depending on the day of the week, most economists subscribe to one of two scenarios. The first is that the nation's gross domestic product--which posted a 1.3% annual growth rate in the first quarter and 0.3% in the second--will likely shrink for months. What that means, by some definitions, is a recession. As of late September, that worst-case scenario seemed plausible as the stock market slumped badly and companies kept churning out a steady stream of bad news. Says Columbia University economics professor Bruce Greenwald: "It may take the economy six months to recover. But even then I don't think it will be a very strong recovery."

The more optimistic view is that a sharp downturn will be short-lived and quickly followed by a recovery. In this scenario, economists like NFIB's Bill Dunkelberg believe that while the third quarter will surely be negative, the fourth will bounce back with positive numbers. That rosier forecast is bolstered by encouraging late September data: The price of crude oil dropped 17% since Sept. 10 and home heating oil is down 23%. That means more money for cash-conscious consumers. It helps that billions are being poured into the financial system to restore business and consumer confidence, the Fed and the international banking community seemed determined to make that theory a reality. By late September, Commerce Secretary Donald Evans was telling reporters that he and others were "looking at every possible stimulus to move [the economy] along." That could mean cuts in capital gains and payroll taxes in addition to the $40 billion aid package passed by Congress on Sept. 18. All totaled, the U.S. economy may get a $140 billion shot in the arm. That doesn't even include the $15 billion governmental cash-and-loan bailout of the airlines. Nor does it account for programs like the SBA's disaster-relief loan program, which allows businesses directly impacted by the World Trade Center collapse to borrow up to $1.5 million each. (See article below.)

Whatever happens, experts seem more hopeful about small businesses than they do larger ones. "They're more likely to take risks, and they react quicker to market changes," says Leslie Mirabeau, director of the Wharton Small Business Development Center. Plus, mounting corporate layoffs may actually end up helping smaller firms, especially now that there's a larger pool of highly skilled workers and a wider selection of office space than there was just a year ago. For companies fortunate enough to be in a position to grow, that may mean more talent and more space for less money. "In the long run, small businesses will prevail," says Mirabeau, citing their resiliency and adaptability as key reasons.

If you're looking for proof of that resiliency, start with the Arab-American business community. Nidal Ibrahim, editor of Arab- American Business, a magazine based in Huntington Beach, Calif., says many of his readers are now managing to cope with both the ailing economy and prejudice. That's certainly true for Dennis Halaby, who co-owns the Damascus Bread and Pastry Shop near the Brooklyn Bridge. Just hours after the World Trade Center attack, a man covered in soot, who had presumably escaped lower Manhattan via the nearby bridge, paused outside Halaby's storefront, spat on his window, and yelled, "Go back to your own country," remembers Halaby, who was born in Brooklyn and whose grandfather started the bakery in 1920. Having survived a World War and New York's many economic ups and downs, Halaby says: "This business has been and will be here a long time."

Paul Neuman, the Manhattan caterer, probably will too--largely because of his ability to adapt his business. Though he's lost thousands due to cancellations, he's hoping not to take a loss, and is even optimistic that revenue will rise 15% this year. Two of his major clients were in the World Trade Center and may soon relocate to New Jersey. If they do, he's considering following them and branching out across the Hudson to open a satellite kitchen. Those are not the plans of a man ready to retreat. As always, says Neuman: "We're going to move where the need is."

With additional reporting by Jennifer Keeney, Maccabee Montandon, Marcia Pledger, Sasha Smith, Risha Stern, and Sylvia Tiersten