Square Businesses Stay Strong Despite Slow Down

It's a sunny Monday afternoon and the Square is bustling.

The music pulses at Jasmine-Sola, an upscale Brattle St. boutique, as customers browse through racks of fashionable tops and suede skirts. There is a long line at the register. A young woman smiles as she pays nearly $200 for a pale silk blouse.

Down the street at Bertucci's, the outdoor seating is filled as customers enjoy a late lunch of pizza and salad.

At Upstairs at the Pudding-a high-end Holyoke St. restaurant-the lunch rush has ended and the staff is readying for dinner.

Owner Mary-Catherine Diebel pauses in her planning for a lavish Easter brunch.

"We're doing well," Diebel says, looking around the spacious, impeccably-decorated restaurant. "The economy was the first question on everybody's mind, but we just really didn't see any effect."

From stores selling luxury items to durable goods, these are cautiously good times for Square businesses.

Despite the stock market downturn that has economists warning of a recession, most shop owners say that their sales have remained intact due to the Square's student and tourist-based clientele.

The Economist's Perspective

The Square's resiliency is somewhat surprising, says economics professor N. Gregory Mankiw.

While he says he would not term the current economic slowdown a "recession," he explains how today's economy could subtly change buying practices.

"People are just less optimistic," Mankiw says.

The current public reaction is very much a response to the unusual stability of the economy for the past two decades, Mankiw says. To have experienced only one mild recession in the past 20 years renders every relatively small fluctuation in the economy more worrisome.

"People are so surprised because it's been relatively stable for an unprecedented period of time," Mankiw says.

He cites the example of someone looking at the funds they have saved for

retirement-assets tied up in large part in unstable Internet stock.

As they feel less secure, Mankiw says, people might choose to eat out a little less often and wait before purchasing durable goods, like a new house, car or even a new set of silverware.

"They'll start deciding to eat macaroni and cheese a few times instead of going out to dinner," he says.

He predicts, then, that the current economic slowdown would have the most visible effect on a store like Crate & Barrel, or on costly Square restaurants.

"People might be nervous and decide to put off buying that new dining room table," Mankiw says. "The more durable the good, the more volatile the business cycle."

But at Crate & Barrel, manager Josh Murphy says sales are level since last year.

The store has not changed any hiring practices or been forced to mark down prices.

As he talks, customers browse through the three floors of home decorations-from colorful arrays of plates and cups to couches, chairs and tables.

"There's been no need to change any of our philosophy yet," Murphy says.

But he says he is cautious.

"I'm thinking that if it continues much longer, people might hesitate before buying the more expensive items," he says.

He suggests that for Square shop owners-as opposed to the Internet businesses that are being hardest hit-it is just too soon to tell.

"Everybody's watching it carefully, but I don't think the majority are doing anything differently," he says.

And according to economics professor David I. Laibson, it is unlikely that the current stock market downturn would have any discernible effect yet on the small businesses in the Square.

The stock market is down 10 percent, Laibson says. He calculates that this corresponds to four-tenths of one percent drop in economic activity.

"You have to say to yourself, this really doesn't amount to a whole lot," Laibson says. "One shouldn't expect a 10 percent decline to amount to a big transformation in the economic activity in the Square."

Eating Out

But at Sandrine's Bistro, a five-year-old restaurant where the decor is tasteful and dinner entrees go for about $30, waitor Evyn Riehl says she blames the establishment's disappointing season on the stock market.

"People are just more aware and more conscious of how they're spending their money," she says. "They'll go somewhere where the prices are lower rather than coming here. There seems to be more of an effort to save money in areas where people used to be frivolous."

She points to the reservation book.

"This is supposed to be our most prosperous time of the year," Riehl says. "We should be slammed every night and we're not even full."

This year's sales were supposed to be record-breaking, she says, but the restaurant hasn't even matched the sales from last year.

"I wouldn't say that we're struggling, but there has been a decline," Riehl says.

She suggests the restaurant's clientele as a reason for the drop in business. Sandrine's often caters to corporations taking clients out to lunch or dinner.

"In a restaurant such as this, where most of our return business is from corporations or people that represent financial institutions, there's definitely been a drop," she says.

The difference is most perceptible in subtle things, she says, like the attitude customers take during tipping.

"People are always going to want to eat, but I've seen a lot more people complaining about tips," Riehl says.

But Sandrine's seems to be the exception.

Just next door at the Pudding, Diebel says the restaurant is in the midst of its most successful season.

She says people, accustomed to the luxuries that accompany economic prosperity, are simply not willing to sacrifice eating out.

"Going out to dinner has just become so ingrained," Diebel says. "I don't think restaurants are where this'll be felt."

But for restaurant owners, it is a topic of discussion.

Diebel says she was recently talking to her accountant, who mentioned that sales have dropped at certain Starbucks coffee chain stores, particularly in the Midwest, as customers have decided to make coffee at home as opposed to buying a morning cappucino.

"Maybe Boston just isn't like that," Diebel suggests.

And on Monday afternoon, there is a five-minute-long line at the Square's Starbucks in the Garage.

Over the past six months, the actual sales have remained within two percent of projected sales, says employee Benjamin Haas.

"There's been no discernible impact," Haas says.

But he says that he has seen the fluctuations in the stock market affect some individual customers.

Haas cites a group of computer programmers who frequent Starbucks. For a time, he says, they thought they might face economic difficulties. But since their company is now going to be purchased by venture capitalists, Haas says he has seen the quality of their coffee drinks increase in anticipation of economic good fortune.

"They've really increased their usage," Haas says, laughing.

Location, Location, Location

Shop owners and economists suggest it is the unique nature of Square clientele that has kept the area largely unaffected by the economic slowdown.

"Cambridge is just a little bit more insulated than other locations," says Cambridge Chamber of Commerce President Tom Lucey. "The educational industry is not significantly impacted by what's happening."

Laibson agrees.

"The dire consequences of a stock market decline apply to particular sectors of the economy and the Square is not high-tech sensitive," Laibson says. "It's mostly a destination for students and tourists and I don't think Harvard students are in the hardest hit group."

-Staff writer Daniela J. Lamas can be reached at lamas@fas.harvard.edu.