Small Businesses Not So Confident

U.S. small businesses grew less optimistic about the economy in March but raised prices for a second straight month, a potential warning sign about inflation, a survey showed on Tuesday.

The National Federation of Independent Business' overall optimism index slipped 2.6 points to 91.9 as owners anticipated a slowdown in economic activity over the next six months and few saw higher real sales growth.

Although businesses were pessimistic about sales, a net nine percent reported raising prices, up from 5 percent in February -- when the price gauge swung into positive territory for the first time in 26 months. The survey was conducted through March 31 and covered 811 businesses.

"The bad news for the Fed is that price pressures continue to mount," the NFIB said in a statement. "It is not clear why owners expect a deterioration in the economy over the next six month. GDP and employment growth have not been spectacular, but have maintained positive momentum."

Rising food and energy prices are putting upward pressure on headline inflation, but Federal Reserve officials expect the impact to be temporary. The U.S. central bank tracks core inflation, which excludes food and energy prices, for monetary policy purposes.

Indications are that rising commodity prices and bad weather held back economic growth in early 2011 after expanding at a 3.1 percent annual rate in the fourth quarter.

The NFIB survey showed sluggish sales remained a major hurdle, with the share of owners expecting higher real sales declining eight percentage points to 6 percent.

It found that 24 percent of respondents planned to raise average selling prices, many by 10 percent or more. The NFIB attributed the planned price hikes to the elimination of unwanted inventory, noting that some increases started long before the commodity price spike.

"The 'fire sale' is over and profits are badly in need of some price support," the NFIB said.Although hiring plans eased in March, job creation remained in positive terrain, with 18 percent of owners looking to add workers over the next three months and six percent planning to reduce their workforce.

"The largest hole in the employment picture remains housing, a million housing starts short of 'normal' and all the associated jobs missing," the NFIB said.

Employers added 216,000 jobs in March, the government reported early this month. Despite concerns about weak sales, more businesses planned capital investment and and many continued to liquidate unwanted inventory -- but at the lowest frequency in 35 months, the NFIB said.