NEW YORK (CNN/Money) - The confidence of U.S. consumers, the life-blood of the world's largest economy, worsened in January, a research firm said Tuesday, though the number beat Wall Street expectations.

The Conference Board, a business research group based in New York, said its closely watched index of consumer confidence fell to 79 from a revised 80.7 in December. Economists, on average, expected a reading of 78.5, according to Briefing.com.

The group's expectations index, which measures consumers' outlook for the future, fell to 81.4 from 88.1. The present situation index, which measures current conditions, rose to 75.4 from 69.6.

"Overall readings continue to reflect the country's lackluster economic activity," said Lynn Franco, director of the group's Consumer Research Center. "Now, with the threat of war looming, consumers have grown increasingly cautious about the short-term outlook."

Separately, the Commerce Department said new home sales rose 3.5 percent in December to a seasonally adjusted annual rate of 1.08 million units from a pace of 1.04 million units in November. Economists, on average, expected sales at a 1.04-million-unit pace, according to Briefing.com.

The report had little impact on U.S. stock prices, which were higher in early trade. Treasury bond prices fell.

Economists keep a close eye on consumer sentiment because consumer spending makes up more than two-thirds of total U.S. gross domestic product (GDP), the broadest measure of economic strength.

Despite a recession that began in 2001, leading to more than 1.8 million layoffs, consumers have kept spending, even as they faced terror attacks, corporate malfeasance and the prospect of a U.S. war in Iraq.

Consumer spending has supported the economy for several months, but most economists believe businesses will need to start spending -- and hiring workers -- soon if the economy is to get healthy.

But, businesses face sluggish profit growth, a glut of excess production capacity left over from the boom times of the late 1990s and their own uncertainty about war in Iraq. Weighed down by these worries, businesses seem unlikely to hire workers until they're sure demand will pick up enough to justify it.

In the Conference Board's report, consumers offered a mixed view of the labor market. The percentage of the 5,000 respondents who expected fewer jobs to be available in coming months rose to 20.9 percent from 20.2 percent in December.

On the other hand, the number of people who thought jobs were hard to find fell to 28.8 percent from 29.7 percent in December.