August consumer sentiment declines sharply

 @ibtimes
on August 17 2007 6:28 PM

U.S. consumer sentiment deteriorated in August to its weakest in a year as more expensive oil, declining home prices and turmoil in financial markets all hurt confidence.

The Reuters/University of Michigan Surveys of Consumers said its preliminary reading on consumer sentiment in August was 83.3, well below a median forecast of 88.0 and a sharp fall from the previous month's final reading of 90.4.

The data came just hours after the Federal Reserve cut its primary discount rate, or the rate the central bank charges commercial banks to borrow directly from it, by half a percentage point. The Fed said the downside risks to economic growth had increased appreciably.

The unexpectedly weak reading in consumer sentiment backed a view that volatile swings in financial markets, including a steep fall in share prices since mid July, are starting to dampen the mood of consumers.

I would have to say that it is not a good sign, and it is showing how the contagion on Wall Street is starting to affect Main Street out there, said George Lucas, senior investment strategist at Deutsche Bank in New York.

The survey also gave more ammunition to those arguing that the Federal Reserve is likely to cut interest rates next month, or possibly even earlier, to calm financial markets and limit downside risks to the economy.

The survey's gauge of current economic conditions was 97.7 in early August, the lowest in 11 months and below the previous month's reading of 104.5.

The survey's one-year inflation expectations index came in at 3.2 percent, the lowest in five months and a drop from a reading of 3.4 percent in the previous month.

Consumer sentiment is often taken as an indicator of future consumer spending, which accounts for two-thirds of the U.S. economy.

(Additional reporting by Joan Gralla)

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