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U.S. Consumer Confidence Unexpectedly Declines to 63.8 From 71.5 in Index

Confidence among U.S. consumers unexpectedly fell in July to the lowest level in more than two years, adding to concern that weak employment gains and falling home prices may keep households from spending.

The Thomson Reuters/University of Michigan preliminary index of consumer sentiment decreased to 63.8, the weakest reading since March 2009, from 71.5 the prior month. The gauge was projected to rise to 72.2, according to the median forecast of 62 economists surveyed by Bloomberg News.

Smaller jobs gains, falling home values and concern over the outcome of government debt talks may be jarring Americans, underscoring Federal Reserve Chairman Ben S. Bernanke comments to Congress earlier this week. The figures raise the risk that household spending, which accounts for about 70 percent of the economy, will continue to cool.

“There’s certainly been a lot of negative headlines, with the very weak employment report a week ago and the ongoing debt limit impasse,” said James O’Sullivan, chief economist at MF Global Inc. in New York, who predicted the gauge would fall to 68.0.

Stocks trimmed earlier gains following the confidence report. The Standard & Poor’s 500 Index rose 0.2 percent to 1,311.16 at 10:51 a.m. in New York. The Treasury 30-year bond declined, sending the yield up to 4.28 percent from 4.25 percent late yesterday, on concern that the U.S. is closer to losing its top credit rating and on a bigger-than-forecast increase in consumer prices excluding food and fuel.

Estimates for the confidence measure ranged from 75 to 68, according to the Bloomberg survey. The index averaged 89 in the five years leading up to the recession that began in December 2007.

Worse Reading

Today’s confidence figures are more dire than the Bloomberg Consumer Comfort Index, which climbed to minus 43.9 for the week ended July 10. Even with the advance, the Bloomberg measure was lower than at the start of the year.

The Conference Board’s monthly sentiment index, which more closely mirrors the labor market, fell to a seven-month low in June.

The Michigan survey’s index 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, decreased to 76.3, the lowest level since November 2009, from 82 the prior month.

The index of consumer expectations for six months from now, which more closely projects the direction of consumer spending, dropped to 55.8, the weakest since March 2009, from 64.8 the prior week.

Less Inflation

Consumers in today’s confidence report said they expect an inflation rate of 3.4 percent over the next 12 months, the lowest since February, compared with 3.8 percent in the prior survey.

Americans expected a 2.8 percent rate of inflation over the next five years, the figures tracked by Federal Reserve policy makers, compared with 3.0 percent the prior month. It was the lowest price-expectation this year.

The cost of living in the U.S. fell in June for the first time in a year as the biggest drop in energy costs since 2008 masked growing inflation in other goods and services like autos, clothing and hotel rates, another report today showed.

The consumer-price index decreased 0.2 percent, compared with the 0.1 percent drop median forecast of economists surveyed by Bloomberg, according to figures from the Labor Department. The so-called core measure, which excludes more volatile food and energy costs, climbed 0.3 percent for a second month, more than forecast and the biggest back-to-back gain in three years.

Factory Production

Also today, the Federal Reserve reported that industrial production rose 0.2 percent in June, less than the median forecast of economists surveyed by Bloomberg, restrained by declines in the output of autos and business equipment.

Slow employment gains are likely contributing to lagging consumer sentiment. Employers added 18,000 jobs in June, the slowest pace in nine months, as the unemployment rate climbed to 9.2 percent, the Labor Department reported last week.

Fed Chairman Ben S. Bernanke said central bankers aren’t ready to start a third round of quantitative easing in testimony before the Senate yesterday.

“Households report that they have little confidence in the durability of the recovery and about their own income prospects,” he said on Wednesday.

Falling home prices are also weighing on consumers’ moods, Bernanke said. Property values dropped 4 percent for the year ended in April, the biggest decline in 17 months, according to the S&P/Case-Shiller index.

Housing Slump

“The ongoing weakness in home values is holding down household wealth and weighing on consumer sentiment,” Bernanke told Congress on Wednesday.

Concern about declining household wealth may be keeping consumers from opening their wallets. Sales at U.S. retailers stagnated in June, the poorest performance in 2010, the Commerce Department reported yesterday.

Unemployment and rising prices for staples such as milk and eggs are weighing on consumers, pushing them to cut back on non- essential items, said Gayle Fuguitt, vice president of consumer insights at General Mills Inc. (GIS)

“In developed markets around the world, unemployment rates are stubbornly high,” Fuguitt, said on a July 13 conference call with investors. “Consumer prices are rising and in the U.S., consumer confidence is at a historic low.”

The Minneapolis-based maker of Cheerios cereal projected a profit for fiscal year 2012 on June 29 that trailed analysts’ estimates.

To contact the reporter on this story: Jillian Berman in Washington at jberman13@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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