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NFIB Small Business Optimism Index fell 0.8 points to 95.3
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September’s Optimism Index gave up 0.8 points, falling to 95.3. At 95.3, the Index is now 5 points below the pre-recession average (from 1973 to 2007). Four Index components improved, six declined. Two declined by 10 points total, accounting for the entire decline in the Index score. Unfortunately, the two that fell drastically were job openings and planned capital outlays, which are directly relevant to GDP growth and hiring.
Pundits report that the Federal Reserve is planning to raise interest rates, probably around mid-2015. But, the message some observers get is a bit different. Federal Reserve officials have made it very clear that any decision to raise rates, or allow the market to work, is “data dependent”. The premise that rates will rise in 2015 is spun off of the economic forecasts of the Fed governors and regional presidents. Their forecasts have been persistently optimistic. If their forecasts are correct, rates can go up, but if their forecasts turn out to be too optimistic, will rates still be allowed to rise? Recent speeches by Federal Reserve officials have emphasized the “slack” in labor markets and the consequent need for “accommodation”, the code word for buying bonds to keep interest rates low. This in spite of the evidence that indicates the low rates are not stimulating the hoped-for spending and hiring but causing many other distortions. An official end to QE3 does not preclude the Federal Reserve from buying bonds through normal Open Market Operations in the conduct of monetary policy. The Federal Reserve has not been able to attain its goal of 2 percent inflation or its unspecified goals for employment (the unemployment rate was quickly disposed of as a target measure). This obviously creates much uncertainty, not just in financial markets but on Main Street as well. Seeing the Federal Reserve trying to create the very thing they were designed to minimize is a bit disconcerting.
With historically low interest rates, why has the percent of small business owners indicating no interest in borrowing reached record high levels? The answer is obvious except to policymakers in Washington, D.C. Borrowed money must be repaid with interest and few business owners see opportunities to make profitable investments in facilities, equipment or employees. There is too much uncertainty, expectations for improved sales are weak, the economy is not expected to improve substantially and there is little hope that the top concerns of business owners will be addressed in Washington, D.C. While Gross Domestic Product (GPD) growth has been positive, Gross Domestic Expenditures have only recently shown some strength. The difference between GDP and Gross Domestic Expenditures, is exports, the life blood of the performance from large companies. As domestic spending picks up, the small business sector will contribute more to growth and employment. Less clear is what will trigger the improvement in domestic spending. More bond buying will not, it will probably take very positive news from Washington dealing with taxes and regulations to improve the mood of consumers and small business owners. Only 1 in 10 consumers thinks government policy is “good”. This will have to improve before the private sector picks up speed.
Posted: October 14, 2014 Tuesday 07:30 AM