Will a Recessionary Mind-Set Sink the Economy?

A growing number of economists seem to believe the economy is heading for a recession next year. The clouds have been gathering over Wall Street for months. But, oddly, the climate on Main Street has been decidedly calmer.

Most small business owners report that it's pretty much business as usual in their neck of the woods, according to a couple of recent surveys. And retail sales over the holidays showed surprising strength, even if it took deep discounting to put consumers in a spending mood.

But that's not to say small business owners are worry free. The Discover Small Business Watch, a monthly survey by Discover Credit Card, reported the fourth consecutive decline in small business optimism in November. But it noted that growing pessimism was due to broader economic concerns, not concerns about their own businesses.

Another widely watched index compiled by the National Federation of Independent Business (NFIB) also pointed to growing pessimism over the economy. Ironically, NFIB Chief Economist Bill Dunkelberg blamed the Federal Reserve for sparking concerns. The Fed cut interest rates on Sept. 18 to bolster the economy and followed up with another rate cut in October. But Dunkelberg says small business owners interpreted the actions as a warning that the economy is sinking.

"The logical response: cut hiring, capital spending, and other growth-related activities," he noted. "This will undoubtedly result in more 'second looks' at loan applications because margins are squeezed." But, so far, that hasn't happened.

Federal Reserve Governor Frederic Mishkin told the House Small Business Committee earlier this month little evidence exists that small businesses are having a harder time getting loans. "At least to date, the supply of credit to small businesses remains healthy," he said.

Yet another survey by NFI Research in New Hampshire found that 60 percent of senior executives and managers at small businesses expect to add jobs over the next 12 months. That's another odd twist in the current economic picture. Despite a slowing economy, unemployment remains relatively low, and most small businesses are experiencing a hiring crunch.

At this point, it's almost impossible to say, definitively, how far the economy will slide. Or whether it will actually rebound as it did earlier this year. Back in May, I first reported that a recession was a distinct possibility. While my instincts were on target, I hedged my outlook then, and I still do now. That's because so much, at this point, depends on psychology.

If, as Dunkelberg noted, business owners begin to think the economy is sinking, the odds are greater that it will. So far, I don't believe a recessionary mind-set is very widespread. As always, however, consumers are the wild card. If they are tapped out, as some economists suggest, a recession is much more likely. But the Fed is expected to cut interest rates again next month, and as long as the Fed maintains liquidity in the economy, a soft landing and modest growth next year is still possible -- if we can keep our recessionary mind-set in check.