Tokyo, Nov. 27 (Bloomberg) -- Japan's small business confidence fell to a three-year low this month as a manufacturing slump and soaring unemployment prompted businesses and consumers to spend less. Shoko Chukin Bank's index of small business confidence fell 0.4 points to 38.1, the lowest reading since November 1998. Confidence among the 800 closely held companies surveyed has fallen for the past 14 months. Factory use fell to the lowest on record in September, and unemployment is at a record-high 5.3 percent, damping spending and hurting company profits. The world's second-largest economy is probably in its worst recession in 20 years, according to the government. ``Small business confidence really reflects how the economy is going,'' said Kohei Iwahara, an economist at Commerz Securities (Japan) Ltd. ``A lot of companies are thinking about shutting down factories in Japan, which means small companies are losing business.'' Ishikawajima-Harima Heavy Industries Ltd., Japan's third- largest machinery maker, plans to make more parts overseas to cut costs after reporting a group loss of 7.8 billion yen ($63.5 million) in the six months ended Sept. 30. NSK Ltd., the second-biggest bearings maker, will close plants and cut 2,500 jobs after forecasting a 7.5 billion yen ($61 million) fiscal-year loss. The confidence index for manufacturers fell 1.3 points to 34.6, the lowest since June 1998. Among non-manufacturing companies, confidence rose 0.2 point to 40.8 points. Japan's economy will probably shrink 0.9 percent in the fiscal year through March, the government forecasts -- the biggest drop since 1980. Economists are more pessimistic, pegging last quarter's contraction at an annualized 2.6 percent. The confidence survey was taken on Nov. 12. A reading below 50 means more companies are pessimistic than optimistic about the economy.