The National Federation of Independent Business (NFIB) Tuesday morning reported that its small business optimism index for January dropped 2.5 points from 100.4 in December to come in at 97.9. The December reading was the highest index reading since October 2006.

The four “hard” measures of the index rose sharply last month. The job creation component slipped a point to 14%, the job openings component rose a point to 26%, capital spending plans fell three points to 26% and inventory investment plans dropped two points to 3%.

The largest increase in an index component was a modest two-point gain in current inventory, which rose from 1% to -1% of business owners surveyed. Expectations for an improved economy fell by 12 points a reading of zero.

In January, small business owners identified their two most important problems as government regulations and red tape (22%) and taxes (21%). Poor sales was a problem for 13% and quality of labor was an issue for 11% of small business owners.

The NFIB’s chief economist said:

November and December readings were very strong, possibly from post-election euphoria. January’s decline was mostly due to owners being less optimistic about business conditions, not spending and hiring plans. Regulation interference and taxes trump the list of concerns for small businesses while inflation risks and credit availability and costs are at the bottom. Only a net three percent of owners reported raising average selling prices. Even though there is a decline in optimism, the small business sector is operating in a somewhat normal zone. The increase in the percent of owners reporting hard to fill job openings is very good news.

The NFIB reports that 26% of business owners currently have positions open that they are unable to fill (up a point from December) and that 42% said there were few or no qualified applicants for the open positions.

Wages and earnings fell four points to a net negative index reading of 19. Some 25% of small businesses reported that compensation costs rose while 2% reported a drop. A seasonally adjusted total of 12% of employers plan to raise compensation costs in the next few months, down five points from the December reading.

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