(Reuters) - Small business confidence fell to a two-year low in the third quarter on increased economic uncertainty that could keep growth on a slow path and unemployment elevated through 2012.
Vistage International said on Tuesday its confidence index dropped to 83.5 from a reading of 92.9 in the second quarter. The index is compiled from a survey of more than 1,700 small business chief executives.
"The principal challenge for CEOs is how to navigate their businesses during an expectedly protracted period of uncertainty that makes them extraordinarily cautious to invest and to hire," said Rafael Pastor, CEO and chairman of the board of Vistage International.
Political bickering in Washington over economic policy and the sovereign debt crisis in Europe threaten to push the U.S. economy back into recession.
An ugly fight during talks to raise the nation's debt ceiling cost the United States its top-notch AAA credit rating from Standard & Poor's and sparked a stock market sell-off.
The CEOs surveyed by Vistage blamed President Barack Obama, Congress, Republicans and Democrats for the lack of leadership in Washington.
The survey, conducted between September 8-19, found that only 18 percent of respondents believed the economy had improved, down from 37 percent in the second quarter. About 39 percent of CEOs said economic conditions had worsened.
However, they do not anticipate an outright recession. Economic data so far for the third quarter have been mixed, with nonfarm employment and retail sales stalling in August.
But manufacturing, the main pillar of the recovery, continues to show some resilience, with industrial production rising modestly in August and national factory activity slowing only marginally.
The economy grew at a 1.0 percent annual rate in the second quarter. Unemployment is currently at 9.1 percent.
Indicating that the economy will probably avoid a second recession, the survey found that while businesses expected to take on fewer new workers, hiring plans remained above the levels recorded during the 2007-2009 recession.
Only 10 percent of businesses planned to cut employment, while 44 percent said they would maintain their current staff levels.
In addition, just 15 percent of businesses said they planned cuts in investments in new plant and equipment. However, the economic uncertainty has made businesses cautious about spending more on fixed capital.
The slowdown in economic growth was expected to limit businesses' ability to raise prices for goods and services, with 47 percent of CEOs expecting an increase in profits, compared with 57 percent in the second quarter.
The third-quarter reading was the smallest increase in two years.
(Reporting by Lucia Mutikani; Editing by Dan Grebler)
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