The Index of Small Business Optimism increased 0.2 points to 93.8, positive but don’t start writing home about it. Four of the 10 Index components posted a gain, four declined and two were unchanged. The entire gain in the Index was accounted for by a 5 point gain in Expected Business Conditions which remains 9 percentage points below last year’s reading. The political climate continued to be the second most frequently cited reason (after weak sales) for why the current period is a bad time to expand. Although early signs of economic activity for Q2 are looking better, growth for Q1 was revised up to only 0.8 percent which is a very weak start for the year. Consumer spending looks like it might add some more energy with consumer sentiment improving a bit in May.

Federal Reserve Chair Yellen and her minions are now talking the financial markets into believing that a rate hike is in the offing. According to market indicators, there is a 40 percent probability for a June hike and a 60 percent probability for July, up from 4 percent before the campaign began. However, these estimates have likely changed in light of the most recent BLS numbers. But the message is the same, rates will go up a whole 25 basis points IF the economic data support it. Well, what does that tell us? Nothing. It’s obviously true, a tautology. What we never know is which data and how good, quantitatively, must it look? What exactly is “maximum employment”, what measures tell us we have arrived? Maybe the leading indicator is how many Fed officials are making speeches with the line “rates will go up soon IF the data support it”. Fed equivocating has been a major source of the growth-suppressing uncertainty that clouds private decision-making for the REAL economy, not financial markets. When it happens, don’t expect the “needle” to move much.

Second quarter GDP growth is looking better, then again, 0.8 percent is not much of a hurdle to get over. Preliminary forecasts from the NY and Atlanta Federal Reserve banks range from 2.9 to 2.2 percent growth from a weak Q1 base (Q4 was weak as well). That would be a return to the “normal” sluggish growth for this expansion. If this is the new “full employment”, it is easier to explain our weak real investment numbers, we still have excess capacity to deliver the goods and services consumers want (or can afford with slow pay growth), so a lot of potential new investment is not “profitable” to undertake. Capital spending on Main Street has been subpar throughout the entire expansion and remains so. There has been restrained borrowing and restrained capital spending. The big firms are just repurchasing shares (at record high prices!).

A year ago, only 16 percent of consumers thought the government was doing a good job with economic policy (University of Michigan). Now, 23 percent think so, an improvement of sorts, but nearly 40 percent characterize policy as poor, basically unchanged. Optimism improved, reaching its highest level since January of 2015, reversing an 11 month 9 point slide in Optimism through April. The percentage expecting their finances to improve reached its highest point in 10 years. Improved credit was supporting spending. Perhaps this will translate into improved consumer spending, but it has yet to show up on Main Street.

Bottom line, we can’t get “3%” growth without an empowered small business sector and right now we don’t have one. Obamacare, the avalanche of regulations (federal, state and local), taxes, and a management team in Washington that can’t get anything done insure mediocre growth which to a significant degree depends on population growth, not under the control of our politicians.