* U.S. consumer sentiment weakest since January
* Deterioration in economic outlook seen relatively modest
* Consumer sentiment seen worsening if gridlock drags on
By Richard Leong
NEW YORK, Oct 11 (Reuters) - U.S. consumer sentimentdeteriorated in October to its weakest in nine months as thefirst federal government shutdown in 17 years underminedAmericans' outlook on the economy, a survey released on Fridayshowed.
The Thomson Reuters/University of Michigan's preliminaryreading on the overall index on consumer sentiment fell to 75.2in October, down from 77.5 in September. This was the lowestfigure since January.
The early October reading fell short of the 76.0 forecast byeconomists recently polled by Reuters.
Prolonging the budget impasse that caused the governmentshutdown, which has kept hundreds of thousands of federalemployees and contractors out of work, would exact a toll onconsumer spending and the overall economy.
"The timing of the fiscal debacle is very bad for retailersgoing into the year-end holiday season," said YelenaShulyatyeva, U.S. economist at BNP Paribas in New York.
Economists had forecast a government shutdown would subtractat least 0.1 percentage point a week from the gross domesticproduct. They said the damage would intensify if the shutdownlasts more than two weeks.
While the sentiment gauge declined for a third straightmonth, the size of the decrease was relatively small, as worriesabout a protracted shutdown were mitigated by some optimismabout income and inflation, survey director Richard Curtin said.
"Consumer confidence posted a surprisingly small decline inearly October despite widespread awareness of the governmentshutdown," Curtin said in a statement.
"The muted response may be due to consumers givingprogressively less credence to the economic scare tactics thathave framed the debates over the past few years," he said.
The survey showed a modest pickup in household plans to buycars and homes.
Financial markets brushed off the latest sentiment data.Wall Street stocks and the dollar clung to earlier gains, whilebond yields were slightly lower.
POSSIBLE FURTHER WEAKNESS
"To be sure, this can quickly change if the impassecontinues," Curtin said of a possible further deterioration inconsumer sentiment.
There were few signs that President Barack Obama and topRepublican lawmakers were close to an agreement to reopen thegovernment and to increase the $16.7 trillion debt ceiling,which is expected to be exhausted on Oct. 17.
Traders fear a failure to raise the debt ceiling would causethe U.S. government to default on its debt, wreaking havoc onfinancial markets and sending the global economy into tailspin.Most of them still are clinging to the hope of a last-minutedeal before next week in a bid to avert a default.
For now, the negative developments in Washington have hurtconsumers' outlook rather than their current assessment on theeconomy and their own finances.
The survey's gauge of consumer expectations fell to 63.9,the lowest level so far this year. This compared with 67.8 inSeptember and a forecast of 67.5.
"We could see further deterioration in the second half ofthe month," BNP's Shulyatyeva said.
The measure on consumers' 12-month economic outlook fell to71 in early October, the weakest level since December 2011. Itfell 15 points from September, which was the biggest one-monthdrop since December amid anxiety about "fiscal cliff."
However, the index of current conditions edged up to 92.8from 92.6 last month. Analysts had projected a reading of 91.0.
The resilience in this measure signaled some optimism aboutrising income. "When asked about their prospects for householdincome gains during the year ahead, the median expected increasewas the highest in five years," Curtin said.
Consumers' view on inflation eased from September followingthe Federal Reserve's decision to refrain from paring its $85billion monthly bond purchases to support the economy recovery.Mortgage rates and other consumer borrowing costs fell from amonth earlier.
The one-year inflation expectation fell to 2.9 percent from3.3 percent, while the five-to-10-year inflation outlook slippedto 2.8 percent from 3.0 percent.
- Budget, Tax & Economy
- Politics & Government
- government shutdown