Oct. 14 (Bloomberg) -- U.S. consumer confidence unexpectedly fell for a third month to the lowest in more than 13 years as concerns persisted about high energy prices and hurricane-related economic disruption.

The University of Michigan's preliminary index of consumer sentiment decreased to 75.4 from 76.9 in September. Televised scenes of widespread destruction from Hurricanes Katrina and Rita and the jump in energy prices that followed reduced consumer confidence last month to the lowest since a reading of 73.3 in October 1992.

While economists expect sentiment to rise in the coming months, consumers will continue to face gas prices near $3 a gallon in the wake of the hurricanes, and may see their home heating bills increase by more than $100 a month this winter, leaving them with less discretionary income.

``Sentiment is stabilizing after the huge Katrina-induced September drop,'' said Ian Shepherdson, chief U.S. economist at High Frequency Economics Ltd. in Valhalla, New York. "We think it is reasonable to expect confidence to rebound over the next few months.''

Current Conditions

The median forecast in a Bloomberg News survey of 51 economists was for a rise in the Michigan sentiment gauge to 80 in October, with estimates ranging from 75 to 84. The preliminary sentiment index is based on a phone survey of about 300 households. The final report for the month, due Oct. 28, will reflect a total of about 500 responses.

The monthly index has averaged 88.2 since the Ann Arbor, Michigan-based university began compiling it in 1978 and was averaging 92.3 this year before the storms hit.

The one-month decline of 12.2 points from August to September was the largest in 25 years.

The preliminary October current conditions index, which reflects Americans' perceptions of their financial situations and whether it's a good time to buy big-ticket items, fell to 95.7 from 98.1 in September. The prior reading was the lowest since December 2003.

The expectations index, based on optimism about the next one to five years, decreased to 62.4 from 63.3. That's the lowest since February 1992, when it was 61.8.

Hurricanes

Hurricanes Katrina and Rita made landfall along the Gulf Coast on Aug. 29 and Sept. 24. Katrina claimed more than 1,240 lives and caused insured losses of as much as $55 billion. Rita claimed more than 35 lives, with insured losses of $7 billion.

The storms dominated news coverage, particularly the painfully slow response to scenes of people trapped by rising floodwaters in New Orleans following Hurricane Katrina. At the time, New Orleans Mayor Ray Nagin and other officials said Katrina alone might have killed 10,000 people.

When consumers were responding to the University's September survey, "gasoline prices were spiking, stations in some regions of the country had no fuel, and worst-case scenarios were being tossed around about an imminent recession,'' said Stephen Stanley, chief economist at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut.

The picture has brightened some over the past month. The Department of Energy reported the average retail pump price of unleaded gasoline has fallen 22 cents a gallon from a post-Katrina record of $3.069 on Sept. 5.

The Labor Department found U.S. payrolls fell by 35,000 in September, instead of the 150,000 economists estimated.

"Some of the things folks worried would go wrong, didn't,'' said Wesley Beal, chief U.S. economist at IDEAglobal.com in New York. "For example, the jobs market held up better than expected.''

Heating Costs

Studies have shown movements in confidence indexes don't necessarily correlate with changes in consumer spending. The Commerce Department reported today U.S. retail sales excluding autos rose a larger-than-expected 1.1 percent last month, the most since April, after a 1 percent increase a month earlier.

And last week, Wal-Mart Stores Inc., the world's largest retailer, said October sales in the U.S. are rising within its forecast range.

"Our business was better in October than in September,'' Paul Finkelstein, chief executive officer of Regis Corp., the world's largest hair salon operator, said before the report. "Time will tell whether that trend continues when people get their first or second heating bill.''

The Energy Department forecast this week that homeowners who rely on oil heat would spend 32 percent more this winter than a year ago, while those using natural gas face a 48 percent increase.

"If we get a cold winter, the first heating bills are going to come due in mid-December, just before people go Christmas shopping,'' said Diane Swonk, chief economist at Mesirow Financial Inc. in Chicago.

Inflation Worries

Gina Martin, an economist at Wachovia Corp. in Charlotte, North Carolina estimates that may mean retail sales growth during the Nov. 1 to Jan. 30 holiday shopping season will slow to 3 percent this year from 7 percent in 2004.

"Once we get past the Katrina effect confidence will still be damped by fuel prices,'' Martin said. "They're taking away from discretionary income and making it harder for people to focus on the holidays and feel good about spending money.''

Federal Reserve officials will be watching the effects of higher prices for energy on consumer behavior, particularly expectations for inflation. Fed Governor Mark Olson said last night in Seattle the central bank is seeing evidence businesses can more easily raise prices.

"The question we're going to have to watch carefully is the extent to which inflation and economic activity will respond in the coming months," Olson said. "The concern that we have is that either inflation could stifle consumer demand" or pass through to broader consumer price increases.

Consumer Prices

In the September Michigan survey, consumers saw inflation running at 4.3 percent a year from now, up from 3.1 percent in August and the highest reading since 1990. Over the next five years, inflation was forecast to be 3.1 percent, the fastest rate of increase since 1997.

If that trend continues, "the Fed may find its categorization of longer-term inflation expectations, which it recently downgraded to `contained' from `well-contained,' increasingly untenable," Carl Ricadonna, a U.S. economist at Deutsche Bank Securities Inc. in New York, said before today's report.

The Labor Department reported today U.S. consumer prices rose 1.2 percent in September, the most in 25 years, as energy costs posted the biggest jump on record after Hurricanes Katrina and Rita. Excluding energy and food, prices rose less than forecast.

"There is no sign of an immediate pass through of energy to core prices, but consumers spent with abandon considering their lack of confidence in the continued health of the economy," said Christopher Low, chief economist at FTN Financial in New York. "That is likely to bolster the Fed's fear of future inflation and reinvigorate their will to raise rates."

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

Last Updated: October 14, 2005 10:03 EDT

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