* U.S. consumer sentiment edges higher unexpectedly
* Trade deficit narrows to smallest in more than 6 years
* Better consumer sentiment lends support to Wall Street (Updates after market close)
By Burton Frierson and Doug Palmer
NEW YORK/WASHINGTON, March 13 (Reuters) - U.S. consumer pessimism receded in March, according to a survey released on Friday, while the trade deficit narrowed in January to its smallest in more than six years as imports fell amid collapsing domestic demand.
The improved data hardly reflected robust economic health. Falling oil prices, another sign of weak global demand, helped bring the trade deficit in.
Similarly, consumer sentiment remained anemic overall and close to a record low. However, in this new era of deflated expectations, Wall Street welcomed the news, which helped boost shares at the end of their best week since November.
"Psychology is not falling apart any more," Pierre Ellis, senior economist, Decision Economics in New York.
U.S. government bonds, which usually benefit from worsening economic conditions, were mixed.
The Reuters/University of Michigan Surveys of Consumers said its preliminary index reading of confidence for March edged up to 56.6 from 56.3 in February. That beat economists' expectations for a fall to 55.0.
The rise came as confidence in government economic policy increased, though most consumers were skeptical that Washington would manage to improve their personal financial conditions.
Still, the Surveys of Consumers said those who thought the administration of U.S. President Barack Obama was doing a good job rose to 23 percent. In February that number was 14 percent and it is up from just 7 percent in January.
"Indeed, the one-month gain from February to early March in confidence in economic policies was the largest ever recorded," the report said.
The index of consumers' assessment of current economic conditions fell to 62.3 from 65.5 in February, hitting the lowest since November 2008.
Signals on the inflation front were mixed, though.
One-year inflation expectations rose to 2.2 percent in March from 1.9 percent in February, while five-year inflation expectations fell to 2.8 percent from 3.1 percent.
MIND THE GAP
The U.S. monthly trade deficit fell 9.7 percent to $36.0 billion, compared to the $38 billion gap Wall Street expected, Commerce Department data showed. The deficit has now narrowed for a record six consecutive months, the longest previous run being from April through August 2007.
"The narrowing reflects the ongoing economic downturn. U.S. consumers are pulling back and that's resulting in fewer imports while exports are falling," said Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pennsylvania. "It reflects how bad economic conditions are everywhere."
U.S. exports of goods and services fell 5.7 percent from December to the lowest since September 2006 and imports tumbled 6.7 percent to lowest since March 2005.
Meanwhile, a second report showed U.S. import prices fell less than expected in February as imported petroleum prices rose for the first time since July.
Import prices slipped 0.2 percent, the smallest decrease since July, after falling by a revised 1.2 percent in January, the Labor Department said.
WORLD TRADE SLUMP
Total world trade is expected to fall this year for the first time since 1982 as businesses and consumers cut back on spending in response to bleak economic news.
Earlier this week, China reported that its exports plunged 25.7 percent in February from a year earlier while imports declined 24.1 percent.
On a year-to-year basis, U.S. exports were down 16.4 percent in January while imports were 22.8 percent lower, the Commerce report showed. The monthly trade deficit has narrowed 39.1 percent over the same period.
In a sign of the bleak conditions facing the world's automakers, both U.S. imports and exports of autos and auto parts were the lowest since July 1998.
U.S. exports of food, feeds and beverages were slightly higher in January, but other major categories such as consumer goods, capital goods and industrial supplies and material all showed declines.
On the import side, all major categories were lower with another drop in monthly oil prices to $39.81 per barrel cutting the value of U.S. crude oil imports to $11.9 billion, the lowest since February 2005.
The bilateral U.S. trade deficit with China swelled 3.5 percent in January as U.S. exports to China fell much faster than U.S. imports from that country.