The Small Business Optimism Index rose 1.3 points to 95.4. After giving up over 4 points in June, the Index clawed back 1.3 points in July, a familiar theme now, which has produced the most grudging gains in the Index’s history – and still not above the 42 year average of 98. Expectations for business conditions and real sales gains accounted for half of the net gain in the Index components.

GDP growth for the first quarter was finally revised to 0.6 percent after an excursion into negative territory. Second quarter growth is initially estimated at 2.3 percent, but with revisions to come. Domestically, the economy feels so flat – because it was, and still is. Exports have been strong in the recession, explaining a lot of things such as the performance of the large firms with profits at a record high share of GDP. The stock market is at record high levels, yet the output of USA, Inc. is less than impressive as shown below. Exports and foreign operations contributed to record high profits for the Large Firm division of USA, Inc. which has been hoarding cash and repurchasing shares, not investing in the real economy.

When comparing the Index against the real growth in domestic spending (GDP + imports – exports), they are clearly highly correlated. Appearing at first blush to be coincident, the Index is really a leading indicator as the surveys are taken in the first month of the quarter while government statistics are available a month after the end of the quarter. Thus, the January survey predicts the growth in domestic spending for the first quarter, and the first estimates from the government come well after the end of the quarter. And the latest data suggests some more strength in the domestic economy is coming, but not a whole lot.

With small business accounting for half of the private GDP, prospects for a strong second half of growth seem modest at best. The Large Firm division will be coasting, not growing or investing, and the Small Business division is not in the mood for rapid expansion and hiring. But even so, the economy grows driven by population growth and investment to cover depreciation and technological obsolescence, but not a lot more. Washington’s plans to eliminate carbon and redistribute the wealth are growth depressants that offer little in the future beyond declining living standards and reduced opportunities. Congress appears to have little stomach to resist as every Congress runs deficits (Gingrich excepted), regardless of the political party in control. Unfortunately, politicians rely more and more on promises of subsidies or free stuff to get elected. This can’t be extrapolated very far into the future before disasters are the most likely outcomes.