March 2 (Bloomberg) -- Confidence among U.S. consumers fell last month from a two-year high as fuel prices rose and employment weakened, a private report showed today.

The Reuters/University of Michigan's final index of sentiment declined to 91.3 in February, a five-month low, from 96.9 in January. The figure compares with a preliminary reading of 93.3 released on Feb. 16.

Lower-income Americans accounted for ``nearly the entire'' drop in confidence, the report said. Such consumers are the ones most likely to feel the pinch of the highest gasoline prices since September. Sentiment among people with higher incomes wasn't as weak, indicating a divergence in attitudes that suggests spending gains may be uneven going forward.

``For consumers, things have gotten a tad more iffy, in the sense that gasoline prices have backed up a bit and the news on the economy is not as robust as it was,'' said Nariman Behravesh, chief economist at Global Insight Inc. in Lexington, Massachusetts. ``The bottom line is consumer confidence is high but a little vulnerable.''

The plunge in stock prices on Feb. 27 came too late to influence last month's data and may weigh on sentiment this month instead, the report said. U.S. stocks dropped the most since March 2003 after a plunge in Chinese equities sparked selling worldwide.

The Michigan confidence index was forecast to fall to 93.5, the median estimate of 56 economists in a Bloomberg News survey. Estimates ranged from 91 to 95.7. The university's gauge averaged 87.3 last year.

Consumer Expectations

The Michigan survey's expectations index, which some economists view as an indicator of future spending, fell to 81.5 from 87.6 in January.

The gauge of current conditions, which reflects Americans' perceptions of their financial situation and whether it's a good time to buy big-ticket items like cars, decreased to 106.7 from 111.3.

Consumers in the survey said they expect an inflation rate of 3 percent in one year, the same as in the January survey.

``Along with the increases in gas prices, lower income households were more concerned about the lack of income gains as well as the potential for increases in unemployment during the year ahead,'' Richard Curtin, the sentiment survey's director, said in a statement.

The drop in confidence was particularly noticeable among households with annual incomes of less than $50,000, he said. For upper-income families, sentiment fell from 104.6 in January to 103.3, which is still near the highs of the last two years, according to economists at JPMorgan Chase Corp. For lower-income families, sentiment dropped to 80.2 from 87.5.

Conference Board

The decline in the Michigan sentiment index is at odds with a report earlier this week from the New York-based Conference Board, which showed confidence unexpectedly rose to the highest in five years last month. Economists attributed the gain to optimism over hiring.

Gasoline prices at the pump rose to $2.38 a gallon in the week ended Feb. 26, the highest since mid-September. Prices averaged $2.28 a gallon in February, up from $2.24 in January.

The economy grew at a 2.2 percent pace in the fourth quarter following a 2 percent rate of expansion the previous three months, the government said this week. Consumer spending rose during the quarter at the fastest pace since the first three months of 2006, more than making up for declines in home construction and business investment.

Poole Comments

Federal Reserve Bank of St. Louis President William Poole said today that while there ``could be a recession,'' one isn't likely, echoing comments this week by former Fed Chairman Alan Greenspan.

A government report yesterday showed personal spending and incomes rose more last month than economists forecast.

Federated Department Stores Inc. this week reported higher sales and profit for the three months ended Feb. 3. Net income at Minneapolis-based Target Corp., the second-biggest U.S. discount chain behind Wal-Mart Stores Inc., rose on sales of consumer electronics and groceries.

``I feel very good about the consumer right now,'' Terry Lundgren, chief executive officer of Cincinnati-based Federated Department Stores, the second-largest U.S. department-store chain, said in an interview Feb. 27.

Still, it's unlikely spending will hold at last quarter's elevated level in coming months, economists said. Spending gains will slow to 2.5 percent by mid-year as less hiring and a rise in the unemployment rate temper consumer demand, according to the median estimate in a Bloomberg survey of economists Feb. 1 to Feb. 8.

Unemployment Rate

The unemployment rate rose to 4.6 percent in January, still close to a five-year low 4.4 percent reached in October.

Fed Chairman Ben S. Bernanke last month called consumers a ``mainstay'' of the economy, and said he expects economic growth to pick up as the drag from housing diminishes later this year. He reaffirmed his outlook in congressional testimony this week.

``There's a reasonable possibility that we'll see some strengthening of the economy sometime during the middle of the year,'' Bernanke said. ``We are looking for moderate growth in the U.S. economy going forward.''

Housing may also weigh on the economy and consumer sentiment, economists said. New-home sales in the U.S. fell in January by the most in 13 years, snuffing out speculation that the real-estate market had started to recover.

Home Depot Inc., the world's largest home-improvement retailer, said sales growth will slow because the U.S. housing slump is likely to last at least another six months.

``We anticipate continuing headwinds in 2007,'' Chief Executive Officer Frank Blake said on a conference call last week. ``There is a lot of inventory to work through in housing. We are not terribly optimistic.''

To contact the reporter on this story: Joe Richter in Washington jrichter1@bloomberg.net

Last Updated: March 2, 2007 11:24 EST