Aug. 17 (Bloomberg) -- Confidence among U.S. consumers dropped in August to the lowest level in a year as slumping stocks and a widening credit crunch added to their worries about weakness in the housing market.

The Reuters/University of Michigan preliminary index of consumer sentiment fell to 83.3, a bigger drop than forecast and the lowest reading since August 2006, from 90.4 a month earlier. A measure of expectations also declined.

Americans turned their attention to the plunge in U.S. stock markets even as a decline in gasoline prices eased a primary worry from recent months. The outlook for household spending may worsen as tighter credit conditions force businesses to curtail hiring, economists said.

``This is consistent with a consumer who's reining in spending,'' said Carl Riccadonna, an economist at Deutsche Bank Securities Inc. in New York. ``We're looking for some softening in the labor market. If companies aren't confident because of what's happening in financial markets, that could make them more cautious about hiring.''

Deutsche Bank's forecast came the closest to the actual reading in a Bloomberg News survey of 60 economists before the report. The median projection was for a reading of 88, and estimates ranged from 83 from 92.5. The index averaged 89 for the 12 months through July.

Early Gauge

Today's report is among the first to measure consumers' outlooks since U.S. stocks began to plunge at the end of July as concern grew that stricter lending requirements would leave companies without the wherewithal to expand and might spur debt defaults. Most of last month's responses in the University of Michigan survey were collected before the market rout.

Stocks rallied today after the Federal Reserve unexpectedly cut the discount rate and said it's prepared to take further action to ``mitigate'' damage to the economy. Before today, the Standard & Poor's 500 Index had fallen 8.9 percent since mid- July.

``Households have noticed what's going on and if the situation does not stabilize and improve there most likely will be some influence on consumer spending,'' said Michael Moran, chief economist at Daiwa Securities America Inc. in New York.

The group's measure of expectations, which some economists view as a proxy for future consumer spending, fell to 74.1, the lowest since July 2006, from 81.5 in July. 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 97.7 from 104.5.

Rate Cut

The central bank reduced the rate at which the Fed makes direct loans to banks by 0.5 percentage point to 5.75 percent. Policy makers kept their benchmark federal funds rate target unchanged at 5.25 percent. Today's action is the first reduction in borrowing costs between scheduled meetings of the Federal Open Market Committee since 2001 and Ben S. Bernanke's first as Fed chairman.

Today's move came after the Fed and other central banks added funds into money markets late last week and early this week in an effort to meet rising demand for cash.

Economists surveyed by Bloomberg News earlier this month said U.S. growth will be less than previously forecast because the rout in subprime borrowing would hamper consumer spending. Growth will slow to an average 2.6 percent annual pace in the second half of the year, 0.2 percentage point less than economists forecasts in July.

Spending Outlook

The Bloomberg News survey showed consumer spending, which accounts for more than two-thirds of the economy, will probably grow at an average 2.5 percent the last six months of this year, a 10th of a percentage point less than forecast in July. Spending expanded at an average 3.7 percent rate per quarter over the last decade.

Wal-Mart Stores Inc. and Home Depot Inc., the two largest U.S. retailers, said on Aug. 14 that the housing slump, rising mortgage defaults and high energy prices will depress earnings this year. Wal-Mart forecast annual profit of as much as $3.13 a share, less than analysts estimated. Home Depot reiterated a production that per-share earnings will fall as much as 15 percent.

``U.S. consumers continue to be under difficult pressure economically,'' Wal-Mart Chief Executive Officer H. Lee Scott said on a recorded call. ``It is no secret that many customers are running out of money toward the end of the month.''

Gasoline Prices

Cheaper gasoline may provide some relief. Prices have fallen every day since July 14, with the average price of regular gasoline at the pump declining to $2.762 a gallon on Aug. 15, the lowest since April 10, according to AAA.

Consumers in the Michigan survey saw an improved outlook for inflation. They forecast an inflation rate of 3.2 percent in one year, compared with the 3.4 percent forecast in July. Inflation probably will run 2.9 percent over the next five years, compared with a projection of 3.1 percent in last month's survey.

To contact the reporter on this story: Courtney Schlisserman in Washington cschlisserma@bloomberg.net

Last Updated: August 17, 2007 11:35 EDT