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NFIB Small Business Optimism Index rose 1 point in April to 93.6
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The Index of Small Business Optimism increased 1.0 points after months of (small) declines, rising to 93.6. Five of the 10 Index components posted a gain, four were unchanged and one posted a small decline. Owners remain very pessimistic about the economy. It was a relief though to see the Index turn up, ending a long string of declines. However, it’s still down from December 2014 when the Index hit an expansion high of 100. Half of the gain came in the two labor market components, an encouraging development.
After logging a disappointing 1.4 percent growth rate in the fourth quarter, the preliminary growth estimate for the first quarter this year was 0.5 percent. The capital stock of the U.S. is barely producing more output even with population growth of nearly 1 percent annually. Yet the valuation of these assets is at record high levels as is the market valuation of bonds, thanks to the efforts of the Federal Reserve Bank. This is a contradiction that begs to be resolved, either by a significant growth in output or a decline in the valuation of these assets. The Fed seems inclined to try to prevent this, targeting financial markets (wealth effects) rather than the real economy. Interest rates are more than low enough, but expected “cash flows” in the numerator are weak, as reflected in the weak optimism expressed by business owners and supported by Fed inaction.
The Federal Reserve continues to send out a message of economic weakness, indicating that the economy is too weak to be able to handle a 25 basis point increase in the Federal Funds rate. This reinforces the uncertainty felt on Main Street and supports the reluctance to spend and hire reflected in the NFIB measures. The Fed has been trying for years to reach its targets of “maximum employment” and 2 percent inflation without success. There is no cheerleader for the economy.
Measures of consumer optimism are also weak, offering no hope of significant gains in spending as the savings rate increases. There is no exuberance to be found, a flatness in optimism pervades the economy, consistent with the plodding growth characterizing this recovery.
There is no leadership in Washington, no articulation of a path to a better future, no evidence that policy-making is coordinated or focused on promoting growth or job creation. Important government institutions are mired in scandal and inaction, voters have lost confidence (20 percent of consumers think government policy is “good”, 41 percent think it is “poor”). The prospects that strong, unifying leadership will emerge after the election appear to be poor.
Posted: May 10, 2016 Tuesday 07:00 AM