SMALL businesses in NSW are heading for the abyss, or so they reckon.

The beating heart of the state economy, NSW small businesses are the most downbeat of any in the country. And the jobs market is starting to weaken due to their flagging confidence, with many small companies starting to lay off staff.

In the past three months, about 15 per cent of the state's small employers have cut back the size of their workforce, according to the Sensis Business Index, released yesterday.

An even greater percentage are tweaking the number of full-time staff they employ. About 60 per cent of NSW small businesses have reduced full-time staff levels since the economy started to decelerate last year.

"Small businesses are making changes in response to these slowing economic conditions," the Sensis report's author, Christena Singh, said. "And the biggest adjustments are occurring in NSW, which is understandable as that is where the most challenging trading conditions are being experienced."

By industry, retailers are the most concerned. Across the country, 41 per cent of surveyed retailers were worried about their outlook, compared with 39 per cent who said they were positive.

Nervousness among small businesses fits in with recent consumer spending patterns. Shoppers, it seems, are turning away from smaller stores but continuing to spend money at larger, chain outlets. Sales from small, independent food stores in NSW - for example, bakeries, butchers and fruit shops - were 23 per cent lower in June than they were in the same month last year.

But in the same period, sales from supermarkets climbed 6 per cent, the most recent figures from the Bureau of Statistics show. Woolworths, for example, this week posted a $1.6 billion year profit, a 26 per cent jump on the previous year.