U.S. Consumer Sentiment Index Lower Than Forecast

By Shobhana Chandra

Sept. 26 (Bloomberg) -- Confidence among U.S. consumers fell in September from a preliminary reading, a sign the worsening credit crisis will prompt Americans to curtail their spending.

The Reuters/University of Michigan final index of consumer sentiment declined to 70.3, lower than forecast, after a reading of 73.1 in early September. The measure was still higher than the August reading of 63, reflecting lower gasoline prices. The gauge of sentiment averaged 85.6 in 2007.

Since the preliminary report was issued on Sept. 12, Lehman Brothers Holdings Inc. filed for bankruptcy, the federal government took over American International Group Inc. and stocks plummeted. The biggest financial meltdown since the Great Depression is likely to hurt consumer spending and the economy for the rest of the year.

``All the financial instability is hurting confidence,'' Karen Cordes, an economist at Scotia Capital Inc. in Toronto, said before the report. ``It'll keep many Americans wondering if they should save more now rather than spend. Consumer spending will likely fall quite a bit.''

The confidence index was forecast to fall to 70.8, according to the median of 62 economists surveyed by Bloomberg News. Estimates ranged from 63.9 to 73.3.

Slower Growth

A government report earlier today showed consumer spending was less than initially estimated in the second quarter, dragging economic growth to a slower pace than previously reported. The U.S. economy expanded at an annual rate of 2.8 percent in the second quarter, down from a preliminary estimate of 3.3 percent issued last month, the Commerce Department said today in Washington.

The index of consumer expectations for six months from now, which more closely projects the direction of consumer spending, declined to 67.2 from a preliminary reading of 70.9 in early September. The measure is up from 57.9 in August.

A gauge of current conditions, which reflects Americans' perceptions of their financial situation and whether it is a good time to buy big-ticket items like cars, dropped to 75 from a preliminary reading of 76.5. The reading was 71 in August.

Consumers said they expect an inflation rate of 4.3 percent over the next 12 months, compared with 4.8 percent in the August survey.

Financial Crisis

The financial crisis escalated in the second half of September, bringing down Lehman Brothers and AIG and roiling stock markets. The S&P 500 index on Sept. 23 capped its biggest two-day slump in six years.

Earlier this month, the government also seized control of mortgage financiers Fannie Mae and Freddie Mac in an attempt to keep the housing slump from worsening.

The final Reuters/University of Michigan consumer confidence report reflects about 500 responses, compared with 300 households for the preliminary survey.

Regular unleaded gasoline prices have eased to an average of $3.72 a gallon at the pump so far this month, compared with $3.76 in August and more than $4 in July, according to AAA.

At the same time, eight consecutive months of job losses in the economy and declines in home prices are making shoppers wary.

Bed Bath & Beyond Inc., the largest U.S. home-furnishings retailer, reported a 19 percent drop in second-quarter profit, and predicted a decline in earnings this quarter.

Sales ``continued to be negatively affected by the economic slowdown in general and by issues specific to the housing industry in particular,'' Chief Executive Officer Steven Temares said on a conference call on Sept. 24.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net