Oct. 12 (Bloomberg) -- Confidence among U.S. consumers this month fell to the lowest since August 2006 as the outlook for housing worsened.

The Reuters/University of Michigan preliminary index of consumer sentiment fell to 82.0 from 83.4 in September. The gauge compares with an average of 89.6 in the first half of 2007.

Borrowing restrictions and home-price declines are adding to the strain for consumers already contending with elevated energy costs. At the same time, job and wage gains continue to buttress spending, as a government report today showed retail sales rose more than forecast in September.

``Consumers see increasing mortgage defaults, higher gas prices and, in some parts of the country, falling home prices,'' Joseph Brusuelas, chief U.S. economist at IDEAglobal in New York, said before the report. ``We won't have a recession, but the economy will muddle through a period of sub-trend growth.''

The Reuters/University of Michigan index was forecast to rise to 84, according to the median estimate of 63 economists in a Bloomberg News survey. Predictions ranged from 81 to 87.

The expectations index, which some economists view as an indicator of future consumer spending, fell to 71.6 from 74.1 in September.

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, increased to 98.2 from 97.9.

Inflation Outlook

Consumers said they expect an inflation rate of 3.0 percent in one year, compared with 3.1 percent in the September survey.

The preliminary Michigan consumer confidence report for the month reflects about 300 responses, compared with about 500 households surveyed for the final survey.

The Standard & Poor's 500 Index yesterday touched its second record high this week, and has risen more than 11 percent since mid-August.

That may not be enough to prevent a slowdown in spending, as Americans grapple with a drop in home prices and higher foreclosures rates that are sapping buying power.

Consumer spending will probably cool to a 2.1 percent annual pace in the final three months of the year from a 3 percent third quarter rate, based on the median estimate in a Bloomberg survey earlier this month. Spending growth has averaged 3.7 percent the past decade.

Foreclosures Rise

U.S. home foreclosures doubled last month from a year earlier as subprime borrowers struggled to make payments on adjustable-rate mortgages, according to RealtyTrac Inc.

Fed Vice Chairman Donald Kohn warned last week that the credit turmoil will probably have lasting effects on consumers, with credit not ``as easily available and as inexpensive for many borrowers as it was a few months ago.''

Food and fuel costs that remain elevated may also subdue spending at malls and shopping centers.

Target Corp., J.C. Penney Co. and Nordstrom Inc. yesterday reduced their profit forecasts after reporting September sales that were lower than analysts estimated.

``Retail sales growth is slowing'' as many Americans rein in spending, said Steven Lowy, a managing director at Sydney- based Westfield Group, the world's largest mall owner by market value.

Low unemployment and higher wages will keep spending from collapsing, economists said. A Labor Department report last week showed the U.S. added 110,000 jobs in September, and revised figures for August showed payrolls expanded after initial government estimates had shown a loss.

``There's no reason to think consumers are going to give up,'' said Tim Rogers, chief economist at Briefing.com in Boston. ``As long as folks are making money, they'll be spending it.''

To contact the reporter on this story: Joe Richter in Washington Jrichter1@bloomberg.net

Last Updated: October 12, 2007 10:30 EDT