Oct. 25 (Bloomberg) -- Consumer confidence unexpectedly fell to a two-year-low in October as high energy prices left consumers with less to spend, raising fears of a slump in holiday spending.

The Conference Board's consumer confidence index fell to 85 from 87.5 in September, the New York-based research group said today. The gauge averaged 98.4 during the past five years. Another report today showed U.S. sales of previously owned homes were unchanged in September from a month earlier.

Consumer confidence fell by the most in 15 years last month after Hurricanes Katrina and Rita ripped through the Gulf Coast. High gasoline prices and home heating bills that may rise by about $400 this winter threaten to depress consumer spending and delay a recovery in confidence, economists said.

``The consumer has finally been shaken,'' said Ellen Beeson, an economist at Bank of Tokyo-Mitsubishi in New York. ``If folks are unsure what the future is looking like over the next few months, they tend to hunker down and sit on cash, and that's not a good start to the holiday shopping season.''

The Conference Board compiles its index of consumer confidence by surveying 5,000 households on general economic conditions, their employment prospects and spending plans. The cutoff date for this month's survey was Oct. 18. The median forecast was 88 in a Bloomberg News survey of economists.

Today's housing report from the National Association of Realtors showed existing homes sold at an annual rate of 7.28 million in September, the same as the month before and second only to a 7.35 million pace in June.

The benchmark 10-year U.S. government bond was unchanged at 10:39 a.m. with the yield at 4.45 percent.

Jobs

The component of the index that tracks consumers' expectations for the next six months decreased to 69.5, the lowest since March 2003, from 72.3. The gauge of optimism about the present situation fell to 108.2 from 110.4.

The share of consumers that said jobs were hard to get rose to 25.3 percent this month from 25 percent in September. The share who said jobs were plentiful in October rose to 20.8 percent compared with 20.7 percent the prior month.

The share of consumers expecting to buy a home declined to 2.7 percent, the lowest since November 2004, from 3.4 percent. The percentage who plan to purchase major appliances fell to 24.1 from 28.4. The percentage of those who expect to buy a car rose to 6.1 from 5.8.

Pessimism

``This degree of pessimism, in conjunction with the anticipation of much higher home heating bills this winter, may take some of the cheer out of the upcoming holiday season,'' said Lynn Franco, director of the board's research center.

The results compare with those from the University of Michigan's preliminary survey of consumer sentiment, which fell to a 13-year-low this month when it was released Oct. 14. The university's final sentiment reading, which features about twice as many respondents, will be released Oct. 28.

Brewbaker said consumer confidence may not return to normal until after the New Year, and consumers may not recover psychologically from the recent storms and rising fuel prices until the second quarter of 2006, when reconstruction spending helps the economy recover.

Hurricanes Katrina and Rita made landfall on Aug. 29 and Sept. 24, respectively. Katrina claimed more than 1,240 lives and caused insured losses of as much as $55 billion. Rita caused more than 35 deaths and insured losses of $7 billion. Both storms took fewer lives and did less damage than the government officials expected.

Energy Disruption

The two storms still managed to disrupt supplies of oil, gas and natural gas by damaging pipelines, offshore production platforms, onshore terminals, natural gas processing plants and refineries along the Gulf of Mexico. The Gulf region accounts for 24 percent of U.S. natural-gas production and about 30 percent of U.S. oil output.

The storms prompted economists to lower their growth forecasts. The median estimate in the latest Bloomberg News monthly survey of 71 economists called for U.S. gross domestic product to grow at an annual rate of 3.4 percent in the third quarter, compared with 4.1 percent in the last survey before Katrina.

The Fed

Consumer confidence may suffer more if the Federal Reserve keeps raising interest rates. The Fed is expected to raise its benchmark rate twice more this year, to 4.25 percent, and then by another quarter percentage point early next year, according to a Bloomberg News survey. White House economic adviser Ben Bernanke was named by President George W. Bush yesterday to succeed Alan Greenspan, and is expected to take over after Greenspan leaves Jan. 31.

Robert Batt, executive vice president of Nebraska Furniture Mart, said he is worried that consumer confidence may tumble further if energy costs remain high and a cold winter increases demand for natural gas and home heating oil. His business is a unit of Berkshire Hathaway Inc., the Omaha, Nebraska, holding company owned by billionaire investor Warren Buffett.

``People in the Midwest are already worried over how much their home heating bills are set to rise this winter,'' Batt said in an interview Oct. 20. ``The economy is going to be in deep yogurt when they start actually getting those bills. If we have a cold winter, confidence in this region could go even lower.''

Heating Bills

Households that use heating oil can expect to pay $378 more this winter than a year ago, a 32 percent increase, according to Energy Department forecasts. Those in the Midwest may spend $500 more.

Oil prices fell last week after meteorologists correctly predicted that Hurricane Wilma would hit southern Florida rather than the oil facilities in the Gulf Coast.

Crude oil for November delivery fell to $60.22 a barrel yesterday on the New York Mercantile Exchange, compared with $70.85 a barrel the day after Hurricane Katrina hit the Gulf Coast.

The average price at the pump for a gallon of gasoline, all grades, fell 12.3 cents to $2.652 the week ending Oct. 24, compared with $3.117 the week ending Sept. 5, just after Katrina struck.

``It's harder for people to splurge when they're worried about the prices at the pump and how they're going to heat their homes this winter,'' said Gina Martin, an economist at Wachovia Corp. in Charlotte, North Carolina. She's predicting retail sales growth will slow this year to 3 percent to 4 percent from last year's 7 percent.

Holiday Spending

Holiday retail sales are expected to increase 5 percent to $435.3 billion from a year earlier, the slowest gain since 2002, according to a forecast by the National Retail Federation. The slowdown may spur retailers including Wal-Mart Stores Inc. and Federated Department Stores Inc. to offer earlier and bigger discounts.

One-fifth of retail sales occur during the holiday period, which lasts from Nov. 1 to Jan. 30, making it the most important period for the industry.

Uneasy consumers are less willing to make big, long-term purchases of items such as cars, according to Diane Swonk, chief economist at Mesirow Financial.

Carlos Ghosn, chief executive of Nissan Motor Co., said his company's U.S. sales fell 22 percent in the first two weeks of October and industrywide sales slumped 33 percent. He said the slowdown was a sign that the world's largest vehicle market is headed for a ``mediocre'' period.

``Demand is down heavily,'' Ghosn said in an interview last week at the Tokyo Motor Show. ``Now that consumers are being convinced little by little that high oil prices are here to stay, they will be shifting their attitude on the market.''

To contact the reporter on this story: Victor Epstein in Washington vepsstein@bloomberg.net.

Last Updated: October 25, 2005 10:47 EDT