The Index of Small Business Optimism fell 0.3 points to 94.1, another monthly decline, and four points below the 40 year average of 98. Four of the 10 Index components posted a gain, six declined. There was a huge improvement in the outlook for business conditions, but rising only to a net 0 percent expecting improvement. Offsetting that gain were large losses in job openings, inventory satisfaction and plans for inventory investment. Many were hoping for some “juice” in economic activity after a very poor performance for the past 12 months. The presidential election is so divisive that it offers little promise of a bipartisan effort to deal with any of these important issues once a new management team is installed in Washington D.C. Fiscal policy, badly in need of an overhaul, will face similar challenges. The political impasse leaves owners with the prospect of slow growth, more uncertainty and little capital spending beyond “maintenance”.

The Federal Reserve has started its usual “hide the rate hike” game, sending observers looking under every rock of data to see if there are 25 basis points underneath. Most of the “rocks” look like pebbles, there’s not a lot of growth in the economy. The Fed thinks it is the determining force shaping interest rates, not markets, a very troubling view. One Fed president said "Long-run expectations for policy rates provide an anchor to long-run interest rates," continuing with "So lower policy rate expectations act as a restraint on how much long-term rates could rise following a surprise over the near-term policy path." In other words, if the Fed says it will keep short rates low, long rates will be low as well.

Acknowledging that artificially keeping rates low is not easy, Fed chair Yellen said that if they run out of government bonds to buy, the Fed could start buying stocks and other uninsured bonds. Taken to the limit, the Fed could own all quality financial assets that have a yield, leaving the private sector with cash. The absurdity of this is obvious, yet the Fed talks about such policies as if they are a normal course of action. The demand for socalled riskless assets, government debt, is strong. The Fed is hoarding trillions of dollars of these assets and keeps buying more, and so yields stay low. If the Fed returned these assets to the private sector (i.e. sold them back), interest rates would rise. Fed policies have prompted firms to spend their resources on mergers and stock buybacks and dividends, not real investment. And, with fiscal policy M.I.A., everything is on hold until the elections bring more clarity - good or bad.

Even more confusing is the Fed’s persistent belief that their current policy track is working, viewing debt purchases as supportive of growth rather than a major source of the uncertainty that blunts economic activity. Clearly the stock market loves the Fed, but bloated stock values are not real productive wealth which is created by real investment in plant, equipment, research and infrastructure, weak in this recovery. Even housing with low mortgage rates has not performed up to expectation based on demographics. It has not occurred to the Fed that what meager growth we have had has occurred in spite of government policy, not because of it. The private sector continues to perform poorly in light of the barriers that governments at all levels throw up in its path.