Small-business owners are struggling with lower revenue and higher costs, while consumers brace for a recession. Here's a look at this week's economic developments and how they may affect your business.

Owner Optimism Declines

Struggling with lower revenue and higher costs, the nation's small-business owners were more pessimistic about the U.S. economy in May, Wells Fargo reported Tuesday.

All six components of the San Francisco-based lender's small-business optimism index declined in the opening quarter, including measures for finances, cash flow, revenue, capital, hiring and credit. The May index, based on a survey of 600 owners nationwide, fell to a five-year low, extending a five-month slide. 

"The nearly 50-percent drop in the index clearly reflects the intensified financial pressures small-business owners have felt over the last three months," Scott Andersen, the lender's chief economist, said in a statement.

Anderson said federal tax rebate checks mailed out earlier this month could give many businesses a boost by the third quarter.

According to Discover, cash flow issues are already improving at many small businesses. In a survey of more than 1,000 small-business owners released this week, only 39 percent reported cash flow problems in May, down from 44 percent in April. Fewer owners also said they felt the economy was getting worse.

Consumer Confidence Falls

Driven by a weaker job market and rising prices, consumer confidence dropped to a 16-year-low in May, with many Americans bracing for a recession, the Conference Board reported Tuesday.

In a survey of 5,000 U.S. households, 30 percent described the economy as bad, up from 27 percent in April, the New York-based private research group reported.

About a third of respondents said they expected economic conditions to continue declining in the next six months.

"Consumers' inflation expectations, fueled by increasing prices at the pump, are now at an all-time high and are likely to rise further in the months ahead," Lynn Franco, director of the group's consumer research center, said in a statement.

Housing Prices Down

Despite a slight upturn in sales last month, U.S. housing prices continue to decline, the Commerce Department reported Tuesday.

Sales of new houses rose by 3.3 percent in May, but remained 42 percent lower than a year ago, the report said. A total of 526,000 new homes were sold last month, compared to 907,000 in April 2007, enough for a 10.6-month supply at the current sales pace. The median sales price for new homes sold in April was $246,100.

According to Standard and Poor, home prices have declined by 14.4 percent decline over the past 12 months.