Consumer optimism in the United States buckled in May to its lowest since Hurricane Katrina, a survey showed on Friday, hit by $3 per gallon gasoline, rising mortgage interest rates and a souring political climate.
Earlier, the government offered some positive news on the economy as the US trade deficit narrowed unexpectedly in March based on a surge in export demand - but rising import prices kept alive jitters about inflation.
The University of Michigan's closely-watched sentiment survey slumped to 79.0 in May from April's final 87.4, far below the median Wall Street forecast for a reading of 86.1.
The report stirred worries that many Americans will stay away from the shopping malls over the next few months as they spend more to fill up their cars - although the link between consumer sentiment and actual spending is often tenuous.
"If sentiment stays at this level - it might even decline further - you should expect a serious slowing in second quarter and third quarter consumption," said Ian Shepherdson, chief US economist with High Frequency Economics.
The dollar fell on news of weakening consumer sentiment, while US stock indexes slipped on the jump in import prices and worries about higher interest rates.
US Treasury debt yields were up, but off highs because of weak consumer optimism. The benchmark 10-year Treasury note was down 9/32 in price, to yield 5.18 percent, up from 5.16 percent on Thursday.
The Michigan reading was the lowest since 1993, excluding a one-month plunge in October after Hurricane Katrina. Both elements of the report - current conditions and expectations - tumbled in May based on a survey of about 500 households.
The median inflation expectation also rose, suggesting that respondents were worried about higher prices eroding their financial well-being.
"Job security is holding up reasonably well. But expectations on housing, stocks and gasoline are looking pretty harmful for consumers," said Richard Iley, senior economist, North America, at BNP Paribas in New York.
"Underneath the surface, it (consumer confidence) is pretty brittle."
The report was consistent with ideas on Wall Street that the Federal Reserve will end its almost two-year run of interest rate increases in June to brace for a slowdown in economic growth from the torrid first-quarter pace.
The housing sector - notable now for stagnant prices and bulging inventories - is likely to lead the way.
Analysts suspect extremely low job approval rates for US President George W. Bush are also eating into confidence. A new Harris Interactive poll on Friday in The Wall Street Journal Online showed Bush's job approval rating fell to a new low of 29 percent from 35 percent in April.
TRADE DEFICIT FALLS AS US EXPORTS JUMP
Earlier, the Commerce Department said record high exports pushed the US trade deficit down to $62 billion in March, its lowest since August and a second straight month of narrowing.
Exports, including to China, climbed to new highs, suggesting a weaker dollar is boosting demand for US goods.
Wall Street analysts had expected the gap to widen to about $67 billion on the back of higher oil import volumes.
"The trade gap is definitely better than expected, which is good any way you look at it," said David Wyss, chief economist at Standard and Poor's Ratings Services in New York.
US exports of $114.7 billion in March included record shipments to Canada, Mexico, the European Union, China and South and Central America.
Exports were especially strong for industrial supplies and materials, such as petroleum products and plastics, and capital goods, which include industrial machines and computers.
Analysts said the data could prompt an upward revision in estimates of first-quarter US economic growth, previously reported at a 4.8 percent annual rate.
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