July 11, 2006

Small businesses downbeat in June: survey

WASHINGTON (Reuters) - Owners of small business are losing
faith in the U.S. economy as they scale back plans to hire
workers and make capital expenditures, a small business survey
released on Tuesday showed.

The National Federation of Independent Business index of
small business optimism fell 1.8 points in June to 96.7 on the
back of weaker job creation plans, declining inventories and
fading hopes for the expansion.

"Sixty percent of the decline from the May reading came
from souring expectations for real sales growth and confidence
that the current period is a good time to expand
substantially," said William Dunkelberg, NFIB chief economist.

A cutback in hiring plans accounted for another 25 percent
and a reduction in plans to add to inventories another 15
percent, NFIB said.

Small business owners expect job growth to slow in the
months ahead on expectations the economy will slow during the
second half of 2006, the survey said.

Just 13 percent of small business owners polled expect
higher real sales in the coming months, down from 20 percent in
the prior survey. Meanwhile, none of the firms surveyed plan to
boost inventories, consistent with views of slowing sales in
the latter half of this year, NFIB said.

Sales have risen faster than inventories for the past two
months, according to wholesale trade data released on Monday by
the Commerce Department.

The Commerce Department said the rise in wholesale
inventories was outpaced by a 1.6 percent climb in sales in
May. This cut the inventories-to-sales ratio, a measure of how
quickly stocks would be depleted at the current sales pace, to
a record low 1.15 months, down from 1.16 months in April.

The NFIB survey said 27 percent of companies polled plan to
boost spending on capital equipment, down 1 percentage point
from May.

Although the number of owners who expect the business
climate to improve over the next six months rose 2 percentage
points from May, more businesses still expected a deterioration
than an improvement in conditions, NFIB said.

"Profits trends and reports of sales gains remained
historically high, but owners have less confidence that strong
growth can continue," the business group said.

Dunkelberg said a trend to higher prices in the survey
belies government reports on core inflation.

"Either inflation is worse than the government stats are
showing, or after 30 years, the relationship between the
percent of firms raising selling prices in the NFIB survey and
the official inflation measure has suddenly ceased to exist,"
he said.

The Federal Reserve on June 29 raised the benchmark federal
funds rate a quarter-percentage point to 5.25 percent to try to
curb price pressures, the 17th straight increase since
mid-2004. The next policy-setting session is August 8.