May 16 (Bloomberg) -- Confidence among U.S. consumers fell in May to the lowest level in almost 28 years as record-high fuel prices, lower home values and fewer jobs rattled Americans.

The Reuters/University of Michigan preliminary index of consumer sentiment decreased to 59.5, the weakest level since June 1980, from 62.6 in April. The measure averaged 85.6 in 2007.

Consumer spending, the biggest part of the economy, is cooling as surging food and fuel costs erode Americans' buying power and job losses mount. Declining home prices and stricter lending rules are also preventing owners from tapping real- estate equity to buy expensive items like cars and furniture, raising the risk that growth will stall in coming months.

``The consumer is getting extremely grumpy,'' said Brian Bethune, director of financial economics at Global Insight Inc. in Lexington, Massachusetts, who forecast confidence would drop to 59.6. ``The economy is flirting with a recession. The only thing keeping it out is this huge amount of pump-priming going on,'' including Federal Reserve interest-rate reductions, the government's stimulus package and discounts by retailers.

The confidence index was forecast to fall to 62, according to the median of 65 economists surveyed by Bloomberg News. Estimates ranged from 58.5 to 66.4.

Housing Starts

Earlier today, a Commerce Department report showed construction of single-family houses in April dropped to the lowest level in 17 years, even as building of condominiums and townhouses rebounded. Builders broke ground on 692,000 single units at an annual rate, the fewest since January 1991.

Total housing starts jumped 8.2 percent to a 1.032 million rate as construction of multifamily units rose 36 percent following a 35 percent drop in March.

The index of consumer expectations for six months from now, which more closely projects the direction of consumer spending, dropped to 51.7 from 53.3.

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, decreased to 71.7, the lowest level since December 1980, from 77.

Consumers said they expect an inflation rate of 5.2 percent over the next 12 months, compared with 4.8 percent in the April survey. Longer-term, Americans projected prices would increase 3.3 percent, up from a 3.2 percent estimate last month.

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

Record Gasoline

Regular unleaded gasoline prices reached a record $3.79 a gallon at the pump yesterday, and have jumped 24 percent since the start of the year, according to AAA.

Credit also is getting harder to obtain, subduing demand for items with bigger price tags. Industry figures showed cars and light trucks sold at an annual pace of 14.4 million in April, the fewest in almost a decade.

Still, reports indicate spending was holding up heading into the second quarter. Retail sales excluding vehicles rose 0.5 percent in April, according to the Commerce Department. Including cars, purchases dropped 0.2 percent last month.

Some companies are faring better. Macy's Inc., the second- biggest department-store chain, reported a first-quarter profit excluding one-time costs, and beat analysts' estimates for a loss. Macy's kept inventories lean ``given the weakened level of consumer confidence,'' Chief Executive Office Terry Lundgren said in a statement on May 14.

`Challenging' Environment

Sales in May are off to ``a very good start,'' Macy's Chief Financial Officer Karen Hoguet said on a conference call. Still, the retail environment will be ``challenging'' until at least the third quarter, she predicted.

Economic growth will drop to a 0.1 percent annual rate in the second quarter, while consumer spending is projected to slow to a 0.5 percent rate, the smallest gain in almost 17 years, according to the median estimate in a monthly Bloomberg survey.

The $117 billion in tax-rebate checks included in the Bush administration's stimulus plan will lead to a rebound in spending in the third quarter, followed by a deceleration by year-end, the Bloomberg poll showed.

In the two weeks since the payments started, the government sent out $27.2 billion in rebates, the Treasury Department said on May 9.

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

Last Updated: May 16, 2008 10:20 EDT