The National Federation of Independent Business said Tuesday that its small-business optimism index decreased to 90.1 in March from 90.9 in February, well below the index long-term average and erasing the slight gains in confidence registered in the first two months of the year.

Still, the reading is above the 89.0 consensus forecast from economists polled by The Wall Street Journal.

The NFIB survey provides a monthly snapshot of small businesses in the U.S., which account for nearly half of private sector jobs.

The decline in confidence was driven by a worsening assessment of the short-term outlook, data from the survey showed.

The number of owners expecting better business conditions over the next six months was unchanged from February at subdued levels, but those who expect real sales to be higher decreased markedly.

“Small-business owners are cynical about future economic conditions,” NFIB chief economist Bill Dunkelberg said.

There are concerns that a banking crisis could develop after the recent turmoil in the sector, which has hit particularly regional banks, while the debt ceiling debate also adds to uncertainty, he said.

“All of this weighs heavily on small business owners, almost all of whom now see deteriorating business conditions and poor prospects for sales,” Mr. Dunkelberg said.

In this context, plans to increase employment fell to their lowest level since May 2020, while the number of small-business owners saying they plan to make capital outlays also fell slightly. Expectations over future credit conditions also deteriorated somewhat, the data showed.

The survey painted a picture of a strong but slightly cooling job market. Around 43% of owners reported difficulty in filling open positions, down four points from February but still a high reading by historical standards.

Inflation remained the most important problem for small businesses–although less so than in February–closely followed by the quality of labor.

Inflation pressures showed signs of abating, according to the survey. The percentage of owners raising average selling prices decreased slightly to 37%, the lowest level since April 2021. Price increases were most frequent in wholesale, retail and construction.

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