Oct. 27 (Bloomberg) -- Confidence among U.S. consumers unexpectedly fell for a second month in October, reinforcing the views of Federal Reserve policy makers who say household spending will be restrained by rising unemployment.

The Conference Board’s confidence index dropped to 47.7, trailing the lowest economist forecast, from a revised 53.4 in September, a report from the New York-based private research group showed today. A measure of employment availability slid to a 26-year low.

The emerging recovery from the deepest recession since the 1930s may fall short of expectations without a sustained rebound in consumer spending, which accounts for 70 percent of the economy. A separate report showed an index of home prices rose in August, indicating the housing market, while stabilizing, may be getting a boost from government aid.

“As long as you have increasing unemployment, consumer confidence will remain mired in the muck,” said Joseph Brusuelas, an economist at Moody’s Economy.com in West Chester, Pennsylvania, who forecast a drop in sentiment. “We think we are going to have another rough patch in the housing market” after a government tax credit expires, he said.

The S&P/Case-Shiller home-price index covering 20 metropolitan areas climbed 1 percent from the prior month, seasonally adjusted, after a 1.2 percent increase in July, the group said today in New York.

Smaller Decline

From a year earlier, the gauge fell 11.3 percent, less than the 11.9 percent decline forecast by the median estimate in a Bloomberg survey of 33 economists. The index fell 13.3 percent in July from a year earlier. Year-over-year records began in 2001.

Most stocks fell for a third straight day. The Standard & Poor’s 500 Index dropped 0.3 percent to close at 1,063.41.

Faltering consumer confidence is weighing on sales at retailers including Limited Brands Inc. The owner of the Victoria’s Secret chain yesterday said sales at stores open at least a year will decline by a percentage in the low- to mid- single digits. It had previously forecast sales would be little changed.

J.C. Penney Co. Chief Executive Officer Myron Ullman told analysts Oct. 23 that the company is “starting to see some stabilization and some modest improvement in traffic,” although consumers are “still under enormous pressure.”

Fewer Jobs

The share of consumers who said jobs are plentiful dropped to 3.4 percent from 3.6 percent, according to today’s report from the Conference Board. The proportion of people who said jobs are hard to get increased to 49.6 percent, the highest level since May 1983, from 47 percent.

The proportion of people who expect their incomes to rise over the next six months decreased to 10.3 percent from 11.2 percent. The share expecting more jobs fell to 16.3 percent from 18 percent.

Buying plans for automobiles, homes and major appliances within the next six months all decreased this month, today’s report showed.

Government reports have shown that while companies are slowing the pace of firing they are reluctant to hire. The U.S. has lost 7.2 million jobs since the recession began in December 2007. Unemployment will top 10 percent in the first quarter of next year, according to a Bloomberg survey this month.

‘Quite Pessimistic’

Consumers “remain quite pessimistic about their future earnings, a sentiment that will likely constrain spending during the holidays,” Lynn Franco, director of the Conference Board Consumer Research Center, said in a statement.

Consumer spending probably increased at a 3.1 percent pace in the third quarter, according to the median projection of economists ahead of the gross domestic product report due in two days. Demand will ease to a 1 percent growth rate the final three months this year, according to median forecasts in Bloomberg’s monthly survey.

Regional Fed bank directors sought to leave borrowing costs unchanged last month, citing weak economic conditions and “strained” financial markets, according to minutes of their meetings on the discount rate released Oct. 20.

“Household spending remained damped, constrained in part by job losses and consumer caution,” the minutes said of the directors’ views.

Fed policy makers next meet Nov. 3-4. At their last meeting, in September, the Federal Open Market Committee repeated its vow to keep its benchmark rate low for an “extended period.”

Tax Credit

Home sales are getting a boost from an $8,000 tax credit for first-time home buyers and mortgage rates that have been held near historic lows by the Fed’s program to buy $1.2 trillion of mortgage-backed securities.

“The good news about this is it really looks like a bottom,” Karl Case, an economics professor at Wellesley College and co-creator of the S&P/Case-Shiller index, said today in an interview on Bloomberg Radio. “The two risks are employment is terrible and the pipeline is still full of foreclosures. That has to be cleared out eventually for this to really turn up and produce a recovery.”

Sales may cool after the tax credit expires. Lawmakers are debating an extension of the credit, which is currently set to lapse on Nov. 30.

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

Last Updated: October 27, 2009 16:33 EDT