The terrorist attacks in Washington and New York have cast a pall over small businesses nationwide.
September’s terrorist attacks dealt an economic blow to the nation’s small-business community. But experts are divided over whether the fallout will be long-term and what the response of the federal government should be in any case.
The economic shock waves from the attacks were fast in coming and far-reaching. Consumer spending and confidence plummeted amid escalating layoffs, heightened security measures, and a downcast mood fed by round-the-clock media coverage of the aftermath.
Entrepreneurs in turn adopted a bunker mentality. In early October, the National Federation of Independent Business (NFIB) released a study showing that optimism among small-business owners had shrunk to its lowest level since 1993. Convinced that sales prospects had turned poor, small-business owners cut back on plans to hire workers and invest in capital spending, according to the NFIB.
Eager to stanch the downward momentum, the Bush administration last month proposed an economic stimulus package containing as much as $75 billion in tax cuts and emergency spending. The Bush plan was announced one day after the Federal Reserve cut interest rates by a half percentage point to bring overnight bank lending rates to 2.5 percent.
According to NFIB chief economist Bill Dunkelberg, however, capital liquidity is not the main problem facing U.S. small businesses. And he doubts the Fed move will have much effect on the Main Street economy.
A better approach, says Mr. Dunkelberg, would be to put more money in the hands of consumers via a tax cut. “Nothing makes a small-business owner more happy than a customer coming through the door,” he says.
At press time, it was impossible to know what shape an economic stimulus package would take, though some sort of ambitious compromise plan appeared inevitable. Likely provisions included tax cuts as well as extended unemployment benefits and perhaps health-care subsidies. Investment tax credits for businesses were also under consideration.
Accounting for about two-thirds of the U.S. economy, consumer spending is directly tied to the fortunes of businesses large and small. But getting consumers to spend more may be easier said than done under current circumstances, tax cuts or no.
The economy was, in fact, on shaky footing before September 11. Credit-card delinquencies hit a 29-year high in the second quarter of this year, for example. And in the short term at least, more bad news is all but guaranteed. In September, job cuts hit a 10-year high of 199,000, up from 84,000 in August, and that figure did not include the tens of thousands of layoffs announced in the airline and hotel industries in the weeks following the attacks in Washington and New York.
Faced with a heavy debt burden and a weakening employment environment, consumers could be forgiven an initial retrenchment. The question is: How long will it last?
Before September 11, the PricewaterhouseCoopers Retail Intelligence System forecast the weakest holiday season since the 1991 recession. It’s reasonable to expect that the outlook has worsened, at least in some quarters.
Not everyone subscribes to a holiday doomsday scenario, however. “Christmas will still be good. There are still a lot of paychecks and there is a lot of money out there,” says Mr. Dunkelberg.
He says the sharp increase in government spending bodes well for future economic activity. Before September 11, the emphasis in Washington was on running a surplus, which, according to Mr. Dunkelberg, essentially took money out of the economy, a process known as “fiscal drag.”
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