Washington drives U.S. consumer sentiment to nine-month low

By Richard Leong

NEW YORK (Reuters) - U.S. consumer sentiment deteriorated in October to its weakest in nine months as the first federal government shutdown in 17 years undermined Americans' outlook on the economy, a survey released on Friday showed.

The Thomson Reuters/University of Michigan's preliminary reading on the overall index on consumer sentiment fell to 75.2 in October, down from 77.5 in September. This was the lowest figure since January.

The early October reading fell short of the 76.0 forecast by economists recently polled by Reuters.

Prolonging the budget impasse that caused the government shutdown, which has kept hundreds of thousands of federal employees and contractors out of work, would exact a toll on consumer spending and the overall economy.

"The timing of the fiscal debacle is very bad for retailers going into the year-end holiday season," said Yelena Shulyatyeva, U.S. economist at BNP Paribas in New York.

Economists had forecast a government shutdown would subtract at least 0.1 percentage point a week from the gross domestic product. They said the damage would intensify if the shutdown lasts more than two weeks.

While the sentiment gauge declined for a third straight month, the size of the decrease was relatively small, as worries about a protracted shutdown were mitigated by some optimism about income and inflation, survey director Richard Curtin said.

"Consumer confidence posted a surprisingly small decline in early October despite widespread awareness of the government shutdown," Curtin said in a statement.

"The muted response may be due to consumers giving progressively less credence to the economic scare tactics that have framed the debates over the past few years," he said.

The survey showed a modest pickup in household plans to buy cars and homes.

Financial markets brushed off the latest sentiment data. Wall Street stocks and the dollar clung to earlier gains, while bond yields were slightly lower.

POSSIBLE FURTHER WEAKNESS

"To be sure, this can quickly change if the impasse continues," Curtin said of a possible further deterioration in consumer sentiment.

There were few signs that President Barack Obama and top Republican lawmakers were close to an agreement to reopen the government and to increase the $16.7 trillion debt ceiling, which is expected to be exhausted on October 17.

Traders fear a failure to raise the debt ceiling would cause the U.S. government to default on its debt, wreaking havoc on financial markets and sending the global economy into tailspin. Most of them still are clinging to the hope of a last-minute deal before next week in a bid to avert a default.

For now, the negative developments in Washington have hurt consumers' outlook rather than their current assessment on the economy 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 in September and a forecast of 67.5.

"We could see further deterioration in the second half of the month," BNP's Shulyatyeva said.

The measure on consumers' 12-month economic outlook fell to 71 in early October, the weakest level since December 2011. It fell 15 points from September, which was the biggest one-month drop since December amid anxiety about "fiscal cliff."

However, the index of current conditions edged up to 92.8 from 92.6 last month. Analysts had projected a reading of 91.0.

The resilience in this measure signaled some optimism about rising income. "When asked about their prospects for household income gains during the year ahead, the median expected increase was the highest in five years," Curtin said.

Consumers' view on inflation eased from September following the Federal Reserve's decision to refrain from paring its $85 billion monthly bond purchases to support the economy recovery. Mortgage rates and other consumer borrowing costs fell from a month earlier.

The one-year inflation expectation fell to 2.9 percent from 3.3 percent, while the five-to-10-year inflation outlook slipped to 2.8 percent from 3.0 percent.

(Reporting by Richard Leong; Editing by Meredith Mazzilli and Chizu Nomiyama)