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Mighty Micro may not come to save the day this time

May 1, 2008 |

Now, here is something I’ve been wondering about a lot lately.

I’ve told you on more than one occasion about the data out of the Bureau of Labor Statistics indicating that, during the last recession, microbusiness employers were able to cushion the effects on the labor market by continuing to hire through almost the entire downturn.

But, since we didn’t have any data on previous recessions, we didn’t know if this is just something that microbusiness employers can do or if other factors were involved.

You see, one of the things that made the last recession as mild as it was had to do with the way consumers continued to spend money right through it. That wasn’t necessarily because of continued job growth among microbusiness employers, either. A lot of the money people were using to fund their spending came from home equity financing and credit cards.

Now, home equity financing is not necessarily very high on anybody’s list of preferred funding sources and they are beginning to look at credit cards askance, too. In fact, there is currently a joint project of the Institute for American Values and the New America Foundation (along with a number of other outfits from across the political spectrum) underway to promote thirft, demote the debt-supported lifestyle, and generally urge Americans to get their individual and collective fiscal acts together.

Overindebtedness has become an American way of life. The national debt has ballooned in recent years, the savings rate currently stands below zero, and roughly 2 million more Americans are likely to lose their homes in the coming year. In addition, many families are carrying high balances on a fistful of credit cards, raiding equity in their homes to pay for short-term wants and needs, and putting their faith in the lottery as the only way out of debt.

But I digress … sort of.

As reported in today’s New York Times, while the economy grew by another fairly anemic 0.6% (advance release, which means that could be revised upward or downward in the coming months), the big difference between the fourth quarter 2007 and the first quarter 2008 was “a sharp pullback in consumer spending the primary factor at play.”

As real estate prices plunge, so does the ability of homeowners to borrow against the value of their homes, crimping a major artery of spending. As banks grow tighter with their dollars in a period of uncertainty, families are running up against credit limits, forcing many to live within their incomes. And as companies lay off employees and cut working hours, paychecks are effectively shrinking.

“This is not a fluke or a technical quirk,” said John E. Silvia, chief economist at Wachovia in Charlotte, N.C. “It’s fundamental. Real disposable income has been squeezed.”

So here’s the $3 trillion question: if consumer spending (roughly 2/3 of the U.S. economy, you will recall) declines sharply enough, then even microbusiness employers might find their revenues in free fall. And, if that happens, then they won’t be able to keep hiring almost all the way through this particular downturn.

Or will they?

In its monthly April National Employment Report, ADP announced yesterday that the nation’s businesses created a net 10,000 new jobs last month. Firms with 50 or more employees cut employment by 32,000 but small firms with fewer than 50 employees increased their workforce by 42,000.

You know, I complain about data lags but let’s face it — it’s usually easier to see what’s already happened in an economy this large than it is to see what’s happening now. It’ll be awhile before we can really see if the Mighty Micro is going to pull the economy’s chestnuts even a little ways out of the fire.

For microbusiness owners, quite a lot is going to come down to whether those consumers who are reduced to spending on necessities will buy enough from them to keep them treading water (or maybe even thriving) until the economy turns around.

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