Confidence among U.S. small businesses rose in August for the first time in three months as the outlook for sales and economic growth turned less gloomy, a private survey found.

The National Federation of Independent Business’s optimism index increased to 88.8 from July’s 88.1 reading. Four of the index’s 10 components rose and one was unchanged. The measure averaged 100.6 in the five years before the economic slump began in December 2007.

While expectations for the economy and sales improved, both measures were still in “recession territory,” the report said, which explains why the outlook for hiring and capital spending at small companies weakened last month. More jobs and increases in consumer spending are needed to bolster the recovery.

“Small business owners are expecting sub-par growth in the second half of 2010,” William Dunkelberg, the group’s chief economist, said in a statement. “What businesses need are customers, giving them a reason to hire and make capital expenditures.”

The group’s measure of expectations for better business conditions six months from now rose to minus 8 percent from minus 15 percent. The gain followed a nine-point drop in July.

The net share of owners projecting higher sales, adjusted for inflation, rose 4 points to zero. The index of earnings expectations increased by 3 points to minus 30 in August.

Profits ‘Essential’

“Profits are essential for the support of capital spending and expansion,” said Dunkelberg.

The survey’s net figures are calculated by subtracting the percent of business owners giving a negative answer from those giving a positive response and adjusting the results for seasonal variations.

A measure of respondents planning to hire over the next three months fell one point to a net 1 percent from 2 percent in July.

Plans for capital investment over the next few months dropped by two points to 16 percent. A net minus 7 percent plan to add to inventories, down three points from a month earlier. A gauge of whether firms think this is a good time to expand fell by one point to 4 percent, the survey said.

Inflation pressures remain contained, the survey showed. August was the 21st straight month that showed more small business owners cutting average selling prices than raising them.

Obama Plan

The Obama administration is urging the Senate to pass its proposed small business assistance package, which would provide tax credits and create aid to companies and local lenders. The bill has been passed by the House of Representatives.

“We are very hopeful that this week, we will see positive movement towards passage of the bill in the Senate,” Treasury Secretary Timothy F. Geithner said Sept. 13 in prepared remarks for a speech to the Congressional Hispanic Caucus Institute in Washington. On the economy, he said “we are climbing out of this hole, but not as fast as we need to.”

The NFIB report was based on 874 small business owner respondents through August 31. Small businesses represent more than 99 percent of all U.S. employers and have created 64 percent of all new jobs in the past 15 years, according to the U.S. Small Business Administration. A small business is defined as an independent enterprise employing up to 250 people.