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ENTERPRISE: Entrepreneurs Under Siege

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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.”

“The lock-box notion, which wouldn’t have done much to help social security anyway, to tell you the truth, is of zero help as far as the economy is concerned,” says Mr. Dunkelberg.

Kurt Barnard, a retail consultant and publisher of Barnard’s Retail Trend Report in Upper Montclair, New Jersey, says consumer spending during the all-important holiday shopping season will be stronger than last year, though barely.

“We believe that the retail outlook, based on our models and analysis, will be muted but slightly better than last year. But keep in mind that last year was very weak, so the news is not that encouraging,” he says.

Mr. Barnard is forecasting average same-store sales growth of 2.5 percent, on the basis of data collected before September 11. He does not expect the terrorist attacks to have much impact on consumer behavior over the holidays.

“The fallout was most severe during the eight or nine days following September 11. But shoppers have since returned to the malls,” he says.

Looking further ahead, Mr. Barnard says the retail sector will rebound in earnest in the spring.

In the meantime, reassuring consumers remains a paramount concern. Martin A. Regalia, vice-president and chief economist of the U.S. Chamber of Commerce, applauded the Fed lending rate cut, contending it will shore up consumer confidence and eventually spark consumer spending.

“If consumers continue to lose confidence in the economy, and thus refuse to spend, the hopes for a quick rebound in economic growth look bleak. But if consumer confidence rights itself, growth could turn around swiftly,” Mr. Regalia said immediately after the Fed action.

Though Hispanic-owned small businesses can expect to endure a slowdown mirroring the overall economy, they are poised to rebound faster in the long run, according to Frank Chow, chief economist of HispanTelligence, the research division of Hispanic Business Inc.

“The same structural elements, such as Hispanic purchasing power, that enabled Hispanic-owned small businesses to grow at a rapid rate before the September 11 attacks will enable them to weather the aftermath better than other segments of the economy,” he says.

One problem confronting small businesses of all stripes is their low collective profile in the nation’s capital. As a result, they’re often less likely than large, influential industries to be the beneficiaries of government largesse in times of crisis.

A case in point is the government’s $15 billion aid package for the airline industry. Rep. Nydia M. Velázquez (D-NY) says that while she does not dispute the need to help the airlines, the Air Transportation System Stabilization Act fails to provide relief for many businesses associated with the air travel industry – airport concessions and suppliers, for example – many of which are small, family-owned enterprises.

Ms. Velázquez, the ranking Democrat on the House Small Business Committee, has introduced legislation that would offer assistance to small businesses affected by the terrorist attacks. The Small Business Emergency Relief Act would offer low- or no-interest loans as well as payment grace periods and, in some cases, forgiveness of existing loans obtained through the Small Business Administration (SBA).

“Congress acted for the airlines. It’s time to stand up for the small businesses that were devastated,” says Ms. Velázquez.

Government assistance is already available to the roughly 40,000 small businesses in the immediate area of what was the World Trade Center. President Bush has declared a disaster area for most of New York City, meaning that Federal Emergency Management Agency (FEMA) grants and loans are available for businesses as well as public institutions, nonprofits, homeowners, and employees. FEMA is currently accepting applications for relief. For information, call (800) 462-9029.

Elsewhere, small businesses that employ military reservists called to active duty in response to the terrorist attacks may qualify for Military Reservist Economic Injury Disaster Loans (MREIDLs) of up to $l.5 million, available through the SBA.

The interest rate on MREIDLs is 4 percent, with a maximum term of 30 years. The SBA determines the amount and terms of each loan on the basis of borrowers’ financial circumstances. The filing period begins when the employee is ordered to active duty and ends 90 days after he or she is discharged.

Many in the rest of the nation’s small-business community, however, are probably on their own. And some sectors are clearly reeling. Aside from the travel industry, small businesses related to tourism and fine dining, among others, have been hit hard.

“It’s a tough time for small business. The economy was falling down before the terrorist attacks,” says Darrell McKigney, president of the Washington, D.C.–based Small Business Survival Committee. “Since September 11, a pause button has been on for small businesses. Everyone is waiting to see what will happen.”

As for government help, his organization advocates initiatives that it says would benefit the U.S. economy as a whole, such as accelerating the rate of tax cuts passed earlier this year, cutting capital gains taxes, and bolstering investor confidence by, among other things, increasing domestic energy production and giving the president greater authority to negotiate trade agreements.

Some small businesses may actually benefit in the aftermath of the attacks. Those in cleanup, construction, and security services are expected to prosper, for instance.

Still, for much of the nation’s small-business community, the watchword for the time being is uncertainty.

“This event has truly shaken the system, and only time will tell if that shock does long-term damage,” says the NFIB’s Mr. Dunkelberg.

PHOTO CREDIT: Tony Gutierrez/Agence France Presse

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