February 12, 2008 / 12:32 PM / 11 years ago

Small businesses sour on economy in January

WASHINGTON (Reuters) - Small businesses are losing confidence in the U.S. economy and have little hope a spate of interest rate cuts or economic stimulus measures will do much to boost sales, according to a survey released on Tuesday.

Children run past a surf shop near Venice Beach in Los Angeles December 26, 2007. Small businesses are losing confidence in the economy and have little hope a spate of interest rate cuts or economic stimulus measures will do much to boost sales, according to a survey released on Tuesday. REUTERS/Lucy Nicholson

The National Federation of Independent Business said its index of small business optimism slipped 2.8 points in January to 91.8, the lowest reading since January 1991, when the U.S. was mired in recession.

“The index is sending a recession signal,” NFIB chief economist William Dunkelberg said in a statement. “But ... this January reading is more of a recession in expectations than in hard economic data,” he said, saying that hiring plans and job openings signaled a stronger economy today than in 1991.

Prior to the first Federal Reserve interest rate cut on September 18, 24 percent of owners polled expected the economy to improve in the coming months, the group said. Twelve days later, just 5 percent expected the economy to improve.

Optimism among small business owners has declined further after each subsequent Fed rate cut, it said.

The Fed has lowered borrowing costs by 2.25 percentage points to 3 percent in five steps since mid-September to try to halt a sharp slowdown in an economy hit by a housing slump and a credit crunch.

The percent of owners citing inflation as their No. 1 problem rose to 8 percent in January, the highest reading since the early 1980s.

Plans to raise prices were unchanged, holding at 26 percent of all owners in January. “Price hikes are less frequent,” Dunkelberg said, adding enough owners are raising prices that inflation gauges are hovering above the Fed’s comfort zone.

During the next three months, 9 percent of the owners plan to create new jobs — 2 points below the fourth quarter average, but much stronger than the net 2 percent recorded in 1991.

“Job markets are softer, but holding up,” NFIB said.

Eleven percent of owners reported that the availability of qualified labor was their top business problem, down 5 points from December, consistent with a softening labor market.

There is no evidence that cash flow problems have increased dependence on credit from the banking system, the group said.

The net percent of small business owners reporting loans harder to get in recent months was unchanged at 7 percent, typical of readings for the past several years, NFIB said.

Reporting by Nancy Waitz, Editing by Chizu Nomiyama

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