A surprise dip in consumer confidence and a slowdown in the housebuilding sector have cast fresh doubt over the strength of the US economic recovery.

As long as personal finances improve, there is a chance that consumers won't act on their fears

Jade Zelnik, Greenwich Capital Markets

The University of Michigan's closely-watched consumer sentiment index for August fell from 88.1 in July to 87.9, its lowest level in nine months.

Analysts had forecast that the index would climb to 88.3.

The decline could herald a slowdown in consumer spending, which accounts for two thirds of all economic activity in the US.

Buoyant consumer spending is credited with propping up the US economy for much of this and last year, despite the lingering effects of the 11 September attacks and the recent stock market slump.

Worries over the economy weighed on Wall Street on Friday, with the benchmark Dow Jones index falling up to 100 points in early trade before recovering to Thursday's closing level.

Future hopes

The University of Michigan said that while consumers' confidence in their current financial position actually rose compared with July, this was offset by a surprisingly sharp fall in their future expectations.

Analysts said the figures reflected concerns over tumbling share prices and corporate collapses.

"I think it reflects the general malaise from the continuing worries about the corporate market and the slide in the stock market," said Astrid Adolfson at MCM Moneywatch in New York.

However, experts questioned whether the consumer sentiment index was a reliable guide to future spending plans, pointing out that retail sales had remained strong this year despite waning confidence.

"As long as personal finances improve, there is a chance that consumers won't act on their fears," said Jade Zelnik, chief economist at Greenwich Capital Markets.

The University of Michigan's latest figures are based on initial interviews with a cross-section of consumers, and will be updated following another round of interviews later this month.

Building work slows

Separate figures from the US Commerce Department showed that housing construction fell by 2.7% in July, its second consecutive monthly decline.

The dip in housing construction also wrong-footed forecasters, with most analysts predicting a 0.5% increase.

Housebuilding activity is seen as an indicator for the overall health of the US economy, with any slowdown interpreted as a sign that growth may be losing momentum.

On a more positive note, official data showed on Friday that US consumer price inflation rose by just 0.1% in July, as lower clothing and air travel costs helped to offset higher petrol prices.

The moderate increase in inflation gives the US Federal Reserve more leeway to cut interest rates in the event of a further slowdown in the months ahead.

Earlier this week the Fed left borrowing costs on hold at their current 40-year low of 1.75% for the ninth month running, but said that the risk of an economic downturn has increased.