By David Harrison 

Consumers' outlook for the U.S. economy fell sharply in early January, reflecting American households' fears over the government shutdown, trade tensions, volatile markets, a cooling global economy and uncertainty over what the Federal Reserve will do next.

The University of Michigan said Friday its consumer-sentiment index was 90.7 this month, down from 98.3 in December. January's preliminary reading was the lowest since October 2016.

The reading was well below the forecast of economists surveyed by The Wall Street Journal, who had expected an index of 96.4 in January.

While the reading does not suggest a recession is imminent, it is a sign that consumers could pull back on discretionary spending, said Richard Curtin, the survey's chief economist. Since consumer spending accounts for two thirds of the U.S. economy, a pullback could contribute to a slowing growth rate in the first quarter.

Friday's results follow other signs that American households and businesses are growing increasingly jittery. On Wednesday, a Fed report found that firms were less hopeful about their prospects this year with some deciding to hold off on making investments.

Skittish investors sent stocks gyrating late last year as they assessed the slower global growth prospects and the possibility that the Trump administration's tariffs could unleash a trade war. The government shutdown, now in its fourth week, could also sap some optimism.

Fed officials have sought to reassure investors and consumers, saying they would be patient before moving to raise interest rates again.

Despite the weak reading, consumers are still upbeat about their personal finances, said Stephen Stanley, chief economist at Amherst Pierpont, in a note to clients. "So the hope is that once the federal government shutdown is resolved (and better yet, if there is some sort of trade deal), attitudes will revert to where they were in 2018."

Write to David Harrison at david.harrison@wsj.com

(END) Dow Jones Newswires

January 18, 2019 11:00 ET (16:00 GMT)