Waning U.S. consumer mood raises recovery questions

NEW YORK/WASHINGTON (Reuters) - U.S. consumers' moods soured in early July on persistent worries about jobs, a survey showed on Friday, offering little hope their spending will help the sputtering economic recovery.

Another report showed domestic demand for foreign goods slumped in May, reflecting persistently weak consumer spending, which helped shrink the monthly trade deficit to the smallest since 1999.

Consumer sentiment wilted in early July to the weakest since March, when confidence in the financial sector and economy was at a low, the Reuters/University of Michigan Surveys of Consumers showed.

Consumers' growing anxiety about a protracted economic downturn, job security and loss of wealth were key factors depressing sentiment, the survey said. Americans were also uneasy about the recent slip in stock prices, some analysts said.

"It underlines the ongoing gloom facing the U.S. consumer and further delays prospects for a near-term recovery. That will weigh heavily on risk sentiment," said Brian Dolan, senior currency strategist with Forex.com in Bedminster, New Jersey.

"Consumers concluded that the economic downturn would last longer and their personal finances would not recover as quickly as they had previously expected," the Reuters/University of Michigan Surveys of Consumers said in a statement.

The survey's preliminary index of confidence for July fell to a reading of 64.6 from the final reading for June of 70.8.

Recent income gains were reported by the fewest consumers in the more than 50-year history of the survey, the statement said.

The survey's expectations component "has been seen as reasonably influenced by equity price moves. Having had a good quarter, equities are down so far in July, so we thought that would be a little bit of a subtraction," said John Ryding, chief economist with RDQ Economics in New York.

On Wall Street, stocks were lower, with the Dow Jones industrial average off nearly 1 percent, while U.S. Treasury prices climbed on the latest signs of economic weakness.

Stocks' recent pullback has put renewed pressure on household budgets. The S&P 500 index has fallen about 4 percent so far in July.

"Consumers reported a larger negative shift in their longer term outlook for the economy. The majority of consumers thought that widespread unemployment would persist over the next five years," the survey said.

Despite the survey's negative outlook, Ryding said he does not think it "derails the recession-ending story.

"We think the recession came to an end in the second quarter but it is a little bit of a question mark on the part of consumers and we're just going to have to see how that plays out."

DEMAND FOR FOREIGN GOODS SLUMPS

The U.S. trade gap narrowed unexpectedly to $26 billion in May, the smallest since November 1999, as exports rose and domestic demand for foreign goods slumped, the government said.

May's import level was the lowest since July 2004 and May marked the 10th straight month in which imports declined, underscoring the weakness in the U.S. economy.

The Commerce Department said exports increased 1.6 percent in May while imports fell 0.6 percent. Economists said the drop in imports signaled continued weakness in the recession-mired U.S. economy.

"The trade deficit report is another indicator that things are not improving as expected," said William Larkin, portfolio manager with Cabot Money Management in Boston. "There is growing pessimism about how quickly the U.S. will recover, which I think will be slower than people expect."

Still, the stronger-than-anticipated export performance could bolster the contribution of trade to economic activity in the second quarter.

The U.S. economy plummeted at a 5.5 percent annual rate in the first three months of the year. Economists expect a much smaller decline in the second quarter, with growth resuming in the second half of the year.

A gauge of future U.S. economic growth edged higher in the latest week, sending its yearly growth rate to a two-year high that suggests a near-term end to the recession, a research group said on Friday.

The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index rose to 118.5 for the week ended July 3 from a downwardly revised 117.4 in the prior period.

(Additional reporting by Camille Drummond, Burton Frierson, Emily Kaiser, Steven C. Johnson and Ellen Freilich; Editing by)

(Reporting by John Parry and Alister Bull; Editing by Dan Grebler)