The uncertainty of the financial markets and the U.S. economy's impending slowdown have caused small business confidence to decline slightly in the latest quarter.

The Canadian Federation of Independent Business's (CFIB) business barometer index fell to 104 in the first quarter of 2008, from 104.2 in the previous period. The index's level was well below past norms, the CFIB said.

Nonetheless, CFIB chief economist Ted Mallett remained positive about the level of small business confidence, saying, "Although lower than most other quarterly results in the past few years, the findings are still far from plumbing the depths of pessimism."

He added that optimism remains strong in several provinces, especially in the Atlantic region.

Newfoundland and Labrador businesses were the most optimistic in the first quarter, with their index rising for the fourth consecutive quarter to 119.6, followed by Saskatchewan which had a reading of 116.1. Business owners in Nova Scotia and New Brunswick also had slightly stronger outlooks than those in the rest of the country.

However, the report pointed out that declines were seen in Alberta, British Columbia, Ontario, Quebec and Prince Edward Island.

Prince Edward Island's index dropped below 100 for the second time in the past three quarters, while Alberta's index fell to a five-year low of 102.8.

Manitoba, meanwhile, was the only province to see first-quarter business optimism coasting at 103.6.

However, the picture was less positive when looking at different industries; seven out the 10 industry groupings in the survey saw a decline, with the manufacturing sector, unsurprisingly seeing the largest drop in optimism to 100.0. This was followed by wholesale businesses which had an index level of 102.2.

Transportation businesses were the hardest-hit by higher fuel prices, concerns of lower shipments and continuing border issues, and were the most pessimistic businesses surveyed for the second quarter in a row.

"Now that Canadian businesses have lived with dollar parity for the past six months, more are sharing the strain," the report read. "Export-oriented manufacturers and transport companies, in particular, are hit doubly by poor exchange rates and slow market demand south of the border."

On the other end of the spectrum, the financial and social services sectors, which traditionally show the highest levels of business optimism, were again the most positive on the list, the federation said.

Meanwhile, the balance of opinion on the employment outlook 12 months from now became slightly more negative, although there were still more business owners expecting to increase their payrolls. Approximately 30 per cent of business owners are looking to hire more full-time staff 12 months from now, down one percentage point from December. As well, the number of entrepreneurs planning to cut full-time employees also increased by another percentage point in the first quarter, the report said.

Again, Newfoundland and Labrador, New Brunswick and Saskatchewan were the most likely to have plans to increase full-time staff levels, as well as Manitoba.

The report noted: "Businesses in Alberta and British Columbia have cooled their hiring plans considerably, from 37 per cent and 41 per cent respectively in December, to 33 per cent in March."

The survey also showed that only 37 per cent of small business owners surveyed expect to have to raise wages by more than two per cent in the next 12 months, well below mid-2007 levels.

The report was based on the responses of 2,048 small business owners.