US small business sentiment retreats in January

Small business
Geri Lavrov | Getty Images

U.S. small business optimism fell in January amid worries over the near-term outlook, but a strengthening labor market should keep the economy on solid ground early in the year.

The National Federation of Independent Business said on Tuesday its Small Business Optimism Index fell 2.5 points to 97.9 last month, reversing December's gains, which had taken the index over the 100 threshold for the first time in eight years.

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It was held back by a plunge in expectations for the next six months as well as pessimism over sales and earnings.

Businesses were also less enthusiastic about increasing inventories, undertaking capital investment projects and expansion plans.

Still, they retained an upbeat view of the jobs market.

"Job creation is the core of growth and the small business sector appears to have shifted to second gear," the NFIB said.

Employment growth is accelerating, with government data last Friday showing the economy added more than a million jobs over the past three months, a feat last achieved in late 1997.

The increase in the number of people receiving a paycheck, combined with the stimulus from lower gasoline prices, should boost consumer spending and blunt the blow on the economy from weaker exports and business investment.

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Softening global demand is weighing on U.S. exports, while lower crude oil prices have forced businesses to curtail capital expenditure projects. These factors combined to hold back the economy to a 2.6 percent annual growth pace in the fourth quarter.

The NFIB survey found that although capital spending plans fell in January, they remained near cycle highs, as did actual capital spending.

While the share of business owners saying this was a good time to expand slipped last month, January was still the second highest reading since December 2007.

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"The small business sector is pulling more of the weight it historically accounted for in the growth of the economy, but still short of its potential," said the NFIB.

The share of owners reporting raising compensation for workers held at 25 percent, the best reading since late in 2007. There was still no sign that increased compensation was forcing businesses to raise prices.