The NFIB Index of Small Business Optimism rose 2.3 points to 94.4. This is the second highest reading since the recession started but not one signaling strong economic growth. Pessimism about the economy and future sales did moderate, 8 of the 10 Index components gained, but planned job creation fell a point and reported job creation stalled after 5 “up” months.

The U.S. economy continued to plod along in the first quarter, now at a revised 2.4 percent. Not much of an improvement over the 1.4 percent fourth quarter reading and still well below trend. The ISM has decline for three straight months and is below 50, the dividing line between expansion and contraction. Government spending has been in contraction for some time now, cutting the growth rate by a half a point or more while the private sector grows – but this is good. The deficit is now projected to fall to $650 billion, crushed by revenues from accelerated 2012 income generation induced by higher 2013 tax rates and by restoration of the FICA tax as well as sequestration. Of course the IRS may still be giving line dancing lessons. The Fed is on course to purchase $540 billion of Treasury bonds (almost all of the projected deficit) and $480 billion of mortgage securities. An increasing number of observers wonder whether this is having any impact of consequence on employment (the alleged target) or even housing. It is contributing to uncertainty about the longer term impact of QE on the economy, bond bubbles, and the impact of the rapid acceleration of house prices (from very low levels historically of course).

The small business half of GDP is clearly not participating much beyond growth generated by population gains. More businesses are being formed than lost, so there is some boost to job creation there, but too many existing firms have not yet started to replace the workers shed during the recession. The Optimism Index is back to the May 2012 level which are identical to the November 2007 level (the Index fell all through 2007, signaling the oncoming recession). Since then, the Index has been higher in only three months, and by less than 2 points. The low for that period was 81.0 reached in March, 2009. So the Index is 13 points higher now, good news, but 6 points below the pre-2008 average and 13 points below the peak for the expansion, bad news. Until this sector gets in gear, it will be hard to generate meaningful economic growth. GDP growth was 8 percent in 1983, the first year of that recovery period.

There are many headwinds for growth, the most important being consumer spending. Nothing encourages hiring and inventory and capital investment more than an growth in customers and spending. Consumer sentiment is up some, but not really supported by income growth or new jobs. The savings rate is under 3 percent, so spending is financed by reduced saving (which pays nothing anyway – people who bought 30 year Treasury bonds in 1983 are just now losing those great coupons). The flow of new regulations is very strong (the President promised to use regulatory power to accomplish his goals even if Congress did not cooperate), each agency with its own set of “victims”. On top of that, the ACA is about to grip the entire business community in a morass of new taxes, forms to fill out, fines and higher labor costs. Our global customers are experiencing slow growth for the most part and buying less. Monetary policy has become incomprehensible and Fiscal policy is in disarray. Uncertainty is a major impediment to economic progress. With 2014 elections almost upon us, we’ll just have to wait and see.