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.

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"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.

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