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Small business optimism slipped in May, despite sharply improved earnings, according to the latest Small Business Economic Trends report from the NFIB Education Foundation. The Foundation's Small Business Optimism Index, a 10-component measure of the economic status, plans, and expectations of America's small companies, dipped to 100.5 in May, off 0.2 of a point from the previous month.

"Overall small-business spending plans are retreating from recent record high levels, but they remain very strong when judged by historical standards," says National Federation of Independent Business Chief Economist William C. Dunkelberg. "We're talking simple slowdown, not recession."

Taxes edged out the quality of labor in the balloting for the most important problem facing small business today. In third place was regulation and red tape, followed by competition from large business.

REVISED PICTURE. Reports of higher interest rates on loans continued to increase. Seasonally adjusted, the net number of companies reporting higher rates was 23% in May. That's down one point since April but 38 points above the December reading. Interest rates paid, however, rose only slightly.

"Don't buy into the picture painted in the May employment report from the Bureau of Labor Statistics," Dunkelberg cautions. "Wait for the revisions." With record numbers of small companies reporting hard-to-fill job slots and raising wages, "fears about a decline in private employment and a deceleration in compensation gains will dissipate as data roll in from the small-business sector," he predicts.

The survey found no sign of letup in the nation's drum-tight labor market. The number of businesses reporting hard-to-fill job openings held steady at the record-high 34% first registered in April. And nearly one of every four small-business owners (24%) cited a shortage of qualified labor as their single biggest business problem -- another record high.

"What is clear is that the economy is not pushing higher," says Dunkelberg. "And that's good news for the 'soft-landing' scenario that economists hope will play out."