Nov. 9 (Bloomberg) -- Confidence among U.S. consumers fell in November to the lowest in two years as rising fuel costs and falling home prices left Americans with less cash to spend, a private survey showed.

The Reuters/University of Michigan preliminary sentiment index fell to 75 from 80.9 at the end of October. It was the second-lowest reading since President George W. Bush's father was in the White House, just above the post-Hurricane Katrina figure of 74.2 on October 2005. The index reached 73.3 in October 1992.

The report heightens concern that consumer spending, which accounts for more than two-thirds of the economy, may weaken more than forecast going into the holiday shopping season. Federal Reserve Chairman Ben S. Bernanke yesterday said the economy may ``slow noticeably'' in the current quarter.

``It really does presage a pullback in consumer spending in the fourth quarter,'' said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, which had the third lowest forecast at 77.8. ``The housing- market recession and financial-market turbulence are starting to hit the consumer with full force.''

Economists forecast the Michigan index would decline to 80, according to the median estimate of 67 economists in a Bloomberg News survey. Estimates ranged from 77 to 83.

The expectations index, which some economists view as an indicator of future spending, fell to 64.7 from 70.1 in October.

Inflation Outlook

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 91, the lowest since March 2003, from 97.6 a month earlier.

Consumers said they expect an inflation rate of 3.4 percent in one year, compared with 3.1 percent in October. Over the next five years, prices will probably rise 2.9 percent, according to the consumers polled.

The preliminary estimate reflects about 300 responses, compared with the 500 households polled for the final release.

Earlier today, a Commerce Department showed the U.S. trade deficit unexpectedly narrowed in September as the dollar's slump helped push exports to a record, giving the economy a lift as the housing recession deepened.

The gap shrank 0.6 percent to $56.5 billion, the smallest since May 2005, from a revised $56.8 billion in August, the department said today in Washington. The report prompted economists to boost estimates for growth in the third quarter.

Strained Consumers

A report earlier this week from the Institute for Supply Management showed the services industries that make up 90 percent of the economy grew at a faster-than-expected pace in October, a sign the housing slump has done little harm to the rest of the economy.

Still, higher fuel prices and falling home prices are constraining consumers.

Regular gasoline prices have surged 10 percent since the beginning of October, and are up 32 percent so far this year, according to AAA. The intraday price of a barrel of crude oil reached $98.62 on Nov. 7, a historic high and a sign that gasoline prices will continue to rise.

Average home prices fell 4.4 percent in August from a year earlier, according to the Case-Shiller Home Price Index, and economists are forecasting further declines. Declining home prices and tougher lending standards make it harder for homeowners to tap their home equity for extra cash to fund spending on home improvement, vacations and college.

Stock Declines

Consumer spending probably will cool to a 2 percent annual pace in the final three months of the year from a 3 percent gain in the third quarter, according to the median estimate of economists surveyed by Bloomberg News this month.

The consumer sentiment survey, conducted since the beginning of the month, probably also captured attitudes about stock market declines in recent days. The Nasdaq Composite Index fell nearly 6 percent through yesterday from its peak for the year reached on Oct. 31.

The Fed on Oct. 31 cut its benchmark rate a quarter point to 4.5 percent, the second reduction in as many months, and signaled it may hold off on further rate cuts pending evidence the economic slowdown was deepening.

Even so, futures traded on the Chicago Board of Trade imply a near-certainty the Fed will lower the rate by at least a quarter point next month.

The credit squeeze, falling home prices and rising gasoline costs are likely to soften demand at retailers.

Holiday sales will rise 4.5 percent this year, the smallest gain in five years, because of the housing slump and higher gasoline prices, Ernst & Young LLP said before today's confidence index was released.

``The main reason is the concern about the housing market,'' Jay McIntosh, Ernst's Americas director of consumer products, said in an interview Nov. 6. ``The other factor is that high energy prices are affecting low-income consumers.''

To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net

Last Updated: November 9, 2007 10:52 EST