Main Street Stands on a Recessionary Precipice

A little-known government agency in Washington made official recently what most small business owners have known for some time -- the nation is in a recession.

It officially began in December 2007, according to the National Bureau of Economic Research, Among its duties, the agency is the official arbiter of national recessions, defined by at least two consecutive quarters of declining gross domestic production.

The two big questions now are, How long will it last and how deep will it go? That will depend on a range of factors, chief of which are consumer and business attitudes. Once a recessionary mindset takes hold, consumers and businesses cut or stop spending because of economic uncertainty. Soon, the cycle feeds on itself. I believe we are on the precipice of just such a vicious cycle. Here’s some of the evidence.

The latest survey of economic conditions by the National Federation of Independent Business (NFIB) found that anxiety among small business owners is the highest it's been in 35 years. Its optimism index fell 5.4 points to 87.5, the third lowest reading since 1973, another year noted for a sharp economic contraction. A reading of 100 reflects economic conditions in 1986.

"The third-quarter decline in Gross Domestic Product was not large, 0.3 percent at an annual rate, but consumer spending -- 70 percent of GDP -- was down more than 3 percent," noted NFIB chief economist William Dunkelberg. "The consumer does not appear ready to get into a holiday mood to save the fourth quarter numbers," he added.

So far, his observation appears to be holding up. Last week, the Friday following Thanksgiving marked the beginning of the holiday shopping season. In fact, it's known as "Black Friday" because this single day of sales traditionally is enough to tip most retailers into the profit column for the year.

Nationwide, more than 172 million shoppers visited stores and Web sites over the four-day weekend, up from 147 million last year, according to the National Retail Federation. Post-Thanksgiving day retail sales rose 3 percent over last year to $10.6 billion, according to early figures released by retail research firm ShopperTrak RCT Corp., which monitors more than 50,000 stores.

This past Monday, known as "Cyber Monday" because it marks the single biggest day of online sales, was also better than expected. Sales were up 15 percent over last year, according to research company comScore Inc. The report said online sales for the four-day period from Black Friday through Cyber Monday jumped 13 percent.

But the numbers are misleading. Online retail spending for the first 31 days of the holiday season (starting Nov. 1) actually declined by 2 percent from a year ago. What's more, the big jump in Thanksgiving weekend online spending is not enough to move the needle very far on overall retail spending. Total online sales for Cyber Monday amounted to $846 million compared with $10.6 billion on Black Friday.

While the turnout of shoppers was surprising, most retail analysts think Black Friday and Cyber Monday were one-time upticks in consumer spending that are unlikely to continue during the rest of the shopping season. Most retailers also engaged in heavy discounting, which means margins will be much slimmer and profits lower. As a result, analysts think this still will be one of the bleakest holiday shopping seasons in decades.

The trend is already evident among small business owners responding to the NFIB survey. Expectations for rising sales hit its second-worst reading in survey history. Weak demand was the single most serious business problem in September, followed by taxes, inflation, and the cost and availability of health insurance.

So what about the widely publicized credit crisis? The NFIB survey found that loan demand was very soft. Only 33 percent of those responding said they were borrowing regularly. That's a point higher than September, but close to the 35-year low of 31 percent. It’s a matter of debate how much of that is based on the reduced need to borrow in the slowing economy and the unavailability of credit.

The net percent of people who reported that their borrowing needs were being met was down two points from September. But the net percent who reported that credit is harder to get actually fell two points to 9 percent of all firms from its normal cyclical high of 11 percent in September. Looking ahead, though, most owners expect deteriorating economic conditions to make borrowing more difficult, according to Dunkelberg.

"The data make it clear that there was no seizing up of credit markets, no frozen supply, no sudden reduction in credit availability to Main Street firms, as portrayed in the media," he said during a recent interview.

So far the government's relief efforts have been focused on the credit crisis. But that needs to change. The battle needs to shift to economic stimulus, because consumer and business spending will be the keys to recovery.

In the coming months policy makers in Washington will be working on plans to revive the economy. As the data suggest, the problems on Main Street are real and growing. If the government can provide relief there and stop the hemorrhage of jobs, it will restore the economy's health faster than even a widespread public works program.

Barring a change of fortune soon, this could well be the sharpest downturn since the 1980-81 recession, and easily the worst since World War II. More likely, it's going to be the worst since the Great Depression. To stop the recessionary spiral, the incoming Obama administration, first and foremost, must break the nation’s recessionary mindset.

As Franklin Roosevelt said during the last depression, we have nothing to fear but fear itself. President-elect Obama urgently needs to send the same message today and create a level of confidence in our future that few now share.