U.S. small business owners have little confidence in the economy and are in no rush to hire or expand, despite signs the recovery is picking up, a survey released on Tuesday showed.

The persistent pessimism poses a challenge for President Barack Obama who has proposed a series of policies aimed at enticing small firms to add jobs. Such policies are critical in a congressional election year when voters are upset about high unemployment.

The National Federation of Independent Business said its monthly index of small business optimism fell 1.2 points in March to 86.8 and below 90 for the 18th consecutive month.

The March reading is very low and headed in the wrong direction, said Bill Dunkelberg, NFIB's chief economist. Something isn't sitting well with small business owners. Poor sales and uncertainty continue to overwhelm any other good news about the economy.

Small businesses normally account for the bulk of new jobs, making them an important part of the recovery. Obama has proposed tax breaks to encourage hiring and special lending programs to try to boost hiring.

The economy registered two consecutive quarters of economic growth to the end of 2009. It probably continued expanding in the first three months of 2010. But small business confidence remains abnormally low. Dunkelberg blames that in part on uncertainty about Washington's policies, particularly those related to taxes and health care.

There is no legislation that has passed or that is promised that is encouraging to small business owners and the news about the fiscal crisis and the need for more taxes is hardly encouraging, the trade group said.

The jobless rate held at 9.7 percent in March, the third straight month, as the labor market continues to lag the economic recovery from the worst downturn since the 1930s.

What small businesses need most are increased sales, giving them a reason to hire and make capital expenditures and borrow to support those activities, said Dunkelberg.

While the survey suggested small firms were done cutting jobs, plans to create new ones remain weak. In March, more firms were planning to reduce headcount than add to it.

Only nine percent of firms reported unfilled job openings on a seasonally adjusted basis, down two points from February and historically low. That showed little hope for a lower unemployment rate, the group said.

Small business owners continued to liquidate inventories and weak sales trends gave little reason to order new stock, the survey showed.

Historically weak plans to make capital expenditures to add to inventory and expand operations also make it clear many borrowers are simply on the sidelines, NFIB said.

(Reporting by Nancy Waitz and Emily Kaiser; Editing by Andrew Hay)

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