Bleak consumer outlook eclipses trade gap gains

NEW YORK (Reuters) - Consumer sentiment tumbled in early November to its lowest since the grim aftermath of Hurricane Katrina, overshadowing a favorable report on Friday that booming exports trimmed the trade deficit to its slimmest since May 2005.

The Reuters/University of Michigan Surveys of Consumers said its consumer sentiment gauge slumped in early November to 75.0 from 80.9 last month, falling short of even the most pessimistic expectations.

This stood in stark contrast to the strong government data on the trade gap, which shrank to an unexpectedly low $56.5 billion in September on the back of record exports. The report could boost previous estimates of economic growth in the third quarter.

However, coming a day after Federal Reserve Chairman Ben Bernanke said the economy would slow noticeably in the fourth quarter, the University of Michigan report could offset any optimism generated by any upward revisions to growth.

Also, the University of Michigan report reflected recent pessimism in financial markets more accurately, and stocks fell again, while the dollar weakened and investors piled into safe-haven government bonds.

"The preliminary November reading of the University of Michigan Consumer Survey was the second weakest result in fifteen years," said Lou Brien, market strategist at DRW Trading in Chicago.

"The only result during that period that was weaker was in October 2005 when it printed 74.2 in the aftermath of the hurricanes."

OMINOUS SIGN

The survey result could be an ominous sign for the economy heading into the key holiday shopping season since consumer sentiment is often seen as a proxy for future spending. Consumers account for two-thirds of the U.S. economy.

The survey's gauge of current economic conditions tumbled to 91.0 -- its worst since March 2003 -- from 97.6 in October. The outlook for the future also looked bleak, with consumer expectations weakening to a two-year low of 64.7 from 70.1 last month.

Also pointing to trouble, the survey's gauge of one-year inflation expectations jumped to 3.4 percent -- its highest since a similar reading in July 2007 -- after holding at 3.1 for the previous two months. Five-year inflation expectations rose to 2.9 percent from 2.8.

TURNING THE CORNER

Still, analysts said any revisions to third-quarter economic growth from the September trade data could be considerable in size. Economists said that the worrying trade deficit appears to be in retreat with the help of a weak U.S. dollar. Exports of goods and services rose for a seventh consecutive month to a record $140.15 billion.

"I think we've turned the corner on the trade imbalance," said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi UFJ.

"With the 3.9 percent initial reading on real GDP it looks like GDP could be pushed up a percentage point to 4.8, 4.9 percent on the revision to Q3 GDP."

In its first estimate of third-quarter gross domestic product, the Commerce Department last week estimated economic growth at an annual rate of 3.9 percent.

Wall Street analysts had expected the trade deficit to come in at $58.5 billion in September, up from the Commerce Department's initial estimate of $57.6 billion for August.

The dollar traded at a series of record lows against the euro this week, raising concerns in Europe and prompting French President Nicolas Sarkozy to warn on Wednesday in a speech to Congress that continued "monetary disarray could lead to economic war."

The trade gap might have been lower if not for record prices for imported oil, which averaged $68.51 in September.

The non-petroleum trade deficit narrowed to $39.6 billion, the lowest since $39.5 billion in May 2004.

A Labor Department report on Friday showed that soaring global oil costs helped drive U.S import prices higher in October at the steepest rate in nearly 1-1/2 years.

Overall import prices climbed an unexpectedly steep 1.8 percent last month, more than double the revised 0.8 percent gain in September for the largest monthly increase since a matching 1.8 percent in March.

(Additional reporting by Doug Palmer, Ellen Freilich, Richard Leong)