U.S. small business confidence fell in January to its lowest level in nearly two years amid worries about the near-term outlook for business conditions and sales growth, consistent with a recent slowdown in economic growth.
The National Federation of Independent Business said on Tuesday its Small Business Optimism Index fell 1.3 points to 93.9 last month, the weakest reading since February 2014. Still, small businesses remained fairly upbeat about the labor market.
The NFIB said there was little sign that a stock market selloff and December's interest rate hike by the Federal Reserve, the first in nearly a decade, had impacted confidence. Owners' perceptions of business conditions in six months weakened sharply as did their views of expected sales.
"These expectations are important determinants of decisions to hire, to expand business operations and to order new inventory, all drivers of economic growth," the NFIB said.
The ebb in confidence mirrored other weak economic data ranging from manufacturing to consumer spending and trade. The economy grew at a 0.7 percent annual pace in the fourth quarter, constrained by a strong dollar, sluggish global demand and an effort by businesses to sell off inventory.
Ongoing capital spending cuts by energy firms as oil prices continue to slump is also weighing on gross domestic product.
Despite the downshift in sentiment and weak economic growth, small businesses are not scaling back on hiring and continue to report a shortage of qualified workers to fill job vacancies.
This is prompting businesses to start raising wages to attract and retain workers. The share of small businesses raising compensation increased to its highest level since 2007.
With the sales outlook weak, businesses continued to hold back on increasing inventories last month and offer price discounts to clear stock from their warehouses.
"It appears that there was a lot of price cutting late in the year to boost sales and reduce inventory," the NFIB said.