Sagging consumer view tempers output optimism

NEW YORK (Reuters) - U.S. consumer sentiment fell unexpectedly this month, tempering optimism inspired by news of a rise in U.S. industrial production in September for a third consecutive month.

The two reports released on Friday suggest the U.S. economy may have closed out the third quarter with surprisingly strong growth but still faces huge hurdles since consumer spending is unlikely to recover quickly from the worst recession in decades.

The Reuters/University of Michigan Surveys of Consumers preliminary index of sentiment for October fell to 69.4 from September's 73.5, below economists' median expectation in a Reuters poll for a steady reading of 73.5.

The report said diverging prospects for the general economy and personal finances would affect the pace of recovery as consumers cut spending to increase savings and pay down debts.

"While consumers still anticipated gains in the general economy and now think that the unemployment rate is close to its cyclical peak, there has been no improvement in consumers' dismal assessments of their personal financial situation," the report said.

"Indeed, personal finances have undergone the longest and deepest decline in the 60-year history of the surveys, and few consumers expect their finances to improve any time soon."

U.S. stocks hit session lows after the disappointing consumer sentiment report, while prices of U.S. government bonds, which investors prefer during times of economic weakness, extended gains.

The Federal Reserve said U.S. industrial production rose 0.7 percent in September, much greater than the 0.2 percent advance that economists polled by Reuters had expected.

The report also showed August's gain was revised up to 1.2 percent from the originally reported 0.8 percent.

For the third quarter as a whole, output advanced at a 5.2 percent annual rate, the first quarterly gain since the first quarter of 2008 and the largest increase since the first quarter of 2005.

The figures will likely reinforce the view that the longest U.S. recession since the Great Depression of the 1930s ended in the third quarter. Economists in a Reuters poll released on Thursday pegged the third-quarter growth rate at 3.1 percent.

"It's encouraging," Paul Ashworth, economist at Capital Economics in Toronto, said of the industrial production data.

"What I worry about is whether growth will be sustainable. Consumer spending will likely remain weak. If the consumers don't come back, it might as well fizzle out."

In other data released on Friday, net overall capital inflows into the United States rebounded to $10.2 billion in August from a revised outflow of $107.7 billion the previous month, the Treasury Department said on Friday. The department originally reported outflows of $97.5 billion for July.

Net long-term capital inflows, excluding swaps, rose to $28.6 billion from $15.3 billion the previous month.

The inflows, however, were not enough to cover the U.S. trade deficit of $30.7 billion for the same month.

(Additional reporting by Wanfeng Zhou and Richard Leong in New York and Emily Kaiser in Washington; Editing by James Dalgleish)