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SMALL-BUSINESS OWNERS' CONFIDENCE in the economy is plummeting, prompting cutbacks in hiring and expansion plans, a new survey shows.

The National Federation of Independent Business said its index of small-business optimism fell 3.3 points in March to 89.6, the lowest reading since the monthly surveys began in 1986.

The decline was driven by a "sour outlook" for business conditions and real sales growth, and by scaled-back plans to increase employment, the trade group said. "We are seeing recession readings," said William Dunkelberg, its chief economist.

Separately, a report from the Labor Department showed that the hiring rate at U.S. companies has been on a downward trend for nearly two years, and that the number of job openings have declined in the past six months. While the manufacturing and construction sectors continue to bear the brunt of the decline, weakness in business services accelerated in February, according to the department's latest Job Openings and Labor Turnover Survey.

Meanwhile, problems persist in the housing market. The National Association of Realtors said its index of pending home sales dropped 1.9% in February to 84.6, the lowest reading since the group began reporting the data in 2001. January's reading was a revised 86.2. Pending sales — transactions that have been signed but not yet closed — were down 21.4% in February, compared with a year earlier.

The NFIB survey showed that prices pose a growing challenge for small-business owners. The percentage who cited inflation as their biggest problem rose to the highest level since 1982, when the NFIB was conducting quarterly, rather than monthly, surveys.

The combination of a slowing economy and rising prices is taking a bite out of profits; the percentage of small-business owners reporting earnings gains dropped to its lowest level in five years.

No respondent complained about credit problems, evidence that the credit mess on Wall Street isn't exacerbating woes on Main Street. But that could also mean more trouble ahead if credit conditions continue to deteriorate.

George Booth, chief executive of Black Rock Capital LLC, a commercial-equipment finance company with six employees based in Bridgewater, Conn., says his company faces significant challenges. "The biggest problem is that everyone's in a holding pattern because nobody has any confidence." he said.

Write to Kelly Evans at kelly.evans@wsj.com.