Job Fears Haunt Us Consumers

America's lengthening dole queues are undermining household optimism, fuelling new worries about the health of the world's largest economy.

Shares on Wall Street lost ground after a closely watched index of consumer confidence registered its lowest reading since the end of the Iraq war. Analysts said US consumers appeared to have abandoned hopes of a "Baghdad bounce" for the economy.

"This is exactly what happened in the aftermath of the first Gulf war," said Richard Dekaser, chief economist at National City Corporation in Cleveland. "There was an immediate favourable improvement in consumer sentiments. Then people came to realise that the world was pretty much the same."

The Dow Jones industrial average fell 86.56 points to 9,109.99 in midday trading.

The strains on the US economy were underlined when government figures showed it notched up a $42.03bn (£25bn) trade gap with the rest of the world in April, an improvement on March's all-time high of $42.9bn, but still the third highest shortfall on record.

The University of Michigan's consumer confidence index fell to 87.2 in June from May's 92.1 reading. Economists had been predicting that the index would continue to post improvements on the back of last month's rise in share prices.

The US Federal Reserve is expected to pay close attention to the sentiment number. It is closely linked to household expenditure which accounts for two thirds of economic activity.

Separate government figures showing a fall in wholesale prices for the second month in a row are also likely to set alarm bells ringing at the Fed which is determined to prevent the US economy from sliding into a deflationary spiral. Economists are now pencilling a further cut in rates when the Fed meets in two weeks.