The National Federation of Independent Business monthly Index of Small Business Optimism was basically unchanged in June, falling 0.1 points to a recession-level reading of 89.2. "The top concern of small business owners today is inflation - the first time since January 1981," said NFIB Chief Economist William Dunkelberg.

Since 1983, the average percent of owners citing inflation as a top problem has been 3 percent. In February 2008, 8 percent cited inflation as their top problem. By May, 17 percent said inflation was their top concern, and in June it rocketed to 20 percent. But plans for hiring and capital spending, as well as job openings, inventory investment plans and expected credit conditions, are all stronger than in most past recessions. However, expectations for real sales gains and improvements in business conditions are as bad as in 1980-82, the worst recession period in recent years.

The net percent of owners reporting higher average selling prices rose another six points to a net 29 percent in June. Plans to raise prices rose four points to a net 36 percent of all owners - up 15 points from last September when the Federal Reserve declared the existence of a credit crunch. "The inflation problem is getting worse, not better, as the economy weakens," said Dunkelberg.

Unadjusted, 41 percent reported raising average selling prices, up four points, and 13 percent reported lower selling prices, unchanged from May.

Job creation among small business owners was down sharply in June - a decline of .5 workers per firm. Six percent of the owners increased employment by an average of 4.3 workers per firm, but 18 percent reduced employment an average of 4.6 workers per firm.

Forty-seven percent of the owners hired or tried to hire (up four points), and 83 percent of those trying to hire reported few or no qualified applicants for the job openings they were trying to fill - surprising for a "soft" labor market. Twenty-one percent (seasonally adjusted) reported unfilled job openings, up six points from May (the 34-year average is 22). Ten percent of owners said the availability of qualified labor was their top business problem, much lower than last September when 17 percent complained about the lack of qualified workers.

Over the next three months, 14 percent plan to create new jobs (down two points), and 8 percent plan workforce reductions (unchanged), yielding a seasonally adjusted net 5 percent of owners planning to create new jobs - up three points from May.

The frequency of reported capital outlays over the past six months drifted lower to 52 percent of all firms (down two points). Spending activity has declined eight points since last September and, adjusted for leasing activity, spending has fallen to early 1980s levels. Thirty-nine percent reported spending on new equipment (down one point), 22 percent acquired vehicles (up three points), 12 percent spent money for new fixtures and furniture (unchanged) and 10 percent improved or expanded their facilities (down 1 point). Four percent acquired new buildings or land for expansion (down one point).

Plans to make capital expenditures over the next few months rose one point to 26 percent, not particularly strong. Four percent characterized the current period as a good time to expand facilities, unchanged from May and historically low. Last September, 14 percent felt it was a good time to expand operations. A net-negative 19 percent expect business conditions to improve over the next six months, a seven point decline from May and 21 points below last September's reading. Expectations for increases in real sales were unchanged, a net negative 11 percent expecting improvements (25 points below September readings).

The net percent of owners reporting earnings improvements declined in June. Seasonally adjusted, those reporting declining earnings outnumbered those with gains by 33 percentage points, five points worse than May. Widespread price increases were unable to counter the pressures from "backdoor inflation" (now reported as a top business problem by the highest percent of owners since 1982) and weak sales. The percent of all firms reporting higher employee compensation rose five points to a net 20 percent of all firms, contributing to profit weakness.

"Profits are under fire," Dunkelberg said.

Of the owners reporting higher earnings (15 percent, down 1 point), 53 percent cited stronger sales (up 3 points), and 13 percent credited higher selling prices. For those reporting lower earnings compared to the previous three months (47 percent, down 1 point), 43 percent cited weaker sales (up 3 points), 4 percent blamed higher labor costs, and 28 percent named higher materials costs (read "energy"). Six percent blamed lower selling prices, 4 percent named higher taxes and 2 percent cited higher insurance costs for the adverse performance of profits.

For the 10th straight month since the Fed declared the existence of a credit crunch, there has been no evidence of credit problems on Main Street. "It is a Wall Street issue," Dunkelberg said.

Regular borrowing activity was reported by 35 percent of owners, unchanged from May and typical of readings for the past 15 years. There is no evidence that cash flow problems have increased dependence on credit from the banking system.

The net percent of owners reporting loans harder to get in recent months fell one point to a net 7 percent (8 percent said "harder," 1 percent said "easier"). The average reading since September's surprise Fed rate hike is 7 percent. Only 2 percent of the owners cited the cost and availability of credit as their No. 1 business problem (down 1 point), far from the record 37 percent reached in 1982. Thirty-five percent reported all their borrowing needs met (up one point) compared to 5 percent who reported problems obtaining desired financing (down two points), a three-point improvement in the net percent reporting all needs met. The remainder did not want to borrow.

Fewer firms reported lower rates on their loans, dropping the net percent of owners reporting higher rates on short-term loans to a negative 11 percent (seasonally adjusted). If the Fed is truly through cutting rates, this statistic will migrate toward zero or a positive number over the coming months.

"Lower rates clearly are not stimulating capital spending, which has drifted lower as the Fed has cut rates," said Dunkelberg. "Unfortunately, the rate paid to savers has also declined as the Fed cut rates. Ordinary savers are being forced to help out the big Wall Street banks by Fed policy."

NFIB’s Small Business Economic Trends is a monthly survey of small-business owners’ plans and opinions. Decision makers at the federal, state and local levels actively monitor these reports, ensuring that the voice of small business is heard. The NFIB Research Foundation conducts some of the most comprehensive research of small-business issues in the nation. The National Federation of Independent Business (NFIB) is the nation’s largest small-business advocacy group. A nonprofit, non partisan organization founded in 1943, NFIB represents the consensus views of its members in Washington and all 50 state capitals.

The National Federation of Independent Business (NFIB) is the leading small business association representing small and independent businesses. Visit them on the Web at http://www.nfib.com.