By Xavier Fontdegloria

Optimism among small-business owners in the U.S. leveled off in May, snapping a three-month streak of steady growth as increasing labor shortages constrained activity.

The NFIB Small Business Optimism Index stood at 99.6 in May, down 0.2 points from the previous month, according to a survey compiled by the National Federation of Independent Business released Tuesday.

The reading misses the 101.1 expected by economists polled by The Wall Street Journal. The index is still below the 104.5 level registered in February 2020, before the pandemic hit the U.S.

"The labor shortage is holding back growth for small businesses across the country," NFIB chief economist Bill Dunkelberg said. If small business owners were able to hire more workers to take care of customers, sales would be higher and would be getting closer to pre-pandemic levels, he said.

Unfilled job openings increased to 48% in May from 44% the previous month, a new record-high, signaling that small businesses struggled to find workers to fill open positions.

The NFIB is a monthly snapshot of small businesses in the U.S., which account for nearly half of private sector jobs. Economists look to the report for a read on domestic demand and to extrapolate hiring and wage trends in the broader economy.

Five of the 10 components that form the index improved in May, three decreased and two were unchanged compared with the previous month.

Plans to increase employment rose by a sharp six points in May, with 27% of those surveyed planning to create new jobs in the next three months even though finding qualified employees remains a problem, the report said.

Plans to make capital expenditures in the short-term remained at a high 27%, while the percentage of owners reporting inventory increases rose slightly. "Owners are selling stuff faster than they can replace the inventory," the report said. However, this trend isn't expected to continue into the second half of the year, it said.

Owners expecting better business conditions over the next six months fell by 11 points to a net negative 26%. The index's components which are forward-looking indicate that owners have waning confidence that the economy will be better by year end, Mr. Dunkelberg said.

"Neither consumers or business owners are exuberant about economic prospects for the rest of the year," he said.

Earning trends over the past three months declined four points to a net negative 11%, while the percentage of owners they think it is a good time to expand fell one point to 13%.

In May, the percentage of respondents raising average selling prices increased four points to 40%, the highest reading since April 1981, the data showed.

Owners are finding that they must rise labor compensation to keep workers and attract new ones, and this cost is being passed on in higher prices along with other costs due to supply chain problems, trade issues, and Covid-19 disruptions, the report said.

Write to Xavier Fontdegloria at xavier.fontdegloria@wsj.com

(END) Dow Jones Newswires

06-08-21 0618ET