August 10, 2004

WASHINGTON (Reuters) - U.S. small businesses grew more optimistic last month even as their ability to push through price increases faded, a survey released on Tuesday showed.

The National Federation of Independent Business said its monthly small business optimism index rose 2.9 points in July to 105.9.

NFIB said the July reading was the highest since December and the second highest since early 1983. It also marked the 16th straight monthly reading over 100, the longest such stretch in the 30-year history of the index.

William Dunkelberg, chief economist for the business lobby group, said the index was out of step with a recent report that showed the U.S. economy grew at just a 3 percent rate in the second quarter. "Growth should be a point higher," he said.

The survey found a recent surge in small businesses' ability to increase prices was fading. Twenty percent of the 1,221 businesses polled said they were able to raise prices, net of those cutting prices, a 9 percentage point drop from June.

"Although one month does not make a trend, the dramatic decline in the incidence of price hikes does lend support to the notion that the rapid rise in prices over the past six months was a 'relief rally' in prices after years of no pricing power," Dunkelberg said.

He said that view was buttressed by a 7 percentage point drop in firms that said they planned to raise prices. Still, at 25 percent, that figure was double year-ago levels.

The pickup in prices earlier this year surprised officials at the Federal Reserve, who are widely expected to bump overnight interest rates up a quarter-percentage point to 1.5 percent at a meeting on Tuesday as they seek to ensure price pressures do not mount.

The NFIB survey found job creation was strong, although not as strong as it had been early in the year, with owners reporting a net addition of 0.1 employees per business last month.

Future hiring plans also strengthened. A net 15 percent of the businesses said they planned to create jobs in the next few months, up from 14 percent in June. NFIB said the July figure was exceeded only by the very high readings of the late-1990s.

The Labor Department said on Friday U.S. nonfarm business added only 32,000 workers to their payrolls last month.

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