Confidence, housing weaken, wholesale prices jump

WASHINGTON -- Consumer confidence plunged to its lowest level since the start of the Iraq war, while wholesale inflation surged to its highest yearly rate in a quarter-century in January, according to Tuesday reports offering fresh evidence the economy is veering toward recession.

If that wasn't enough, a closely watched housing index released Tuesday found U.S. home prices dropped 8.9% in the final quarter of 2007, compared with a year ago. That's the steepest decline in the 20-year history of the S&P/Case-Shiller home price index.

Together, those reports complicate the work of the Federal Reserve, which has been cutting interest rates since September to try to ease a credit crunch in financial markets and bolster business and consumer spending.

The central bank's ability to maneuver could be limited if inflation continues rising and consumers cut spending.

The New York-based Conference Board said Tuesday that its Consumer Confidence Index plunged to 75 in February from 87.3 in January. With the exception of a drop in consumer sentiment at the onset of the Iraq war in 2003, the report is the most downbeat in 15 years. Things don't look much brighter down the line. Consumers' assessment of economic conditions in the coming six months is at a 17-year low, according to the survey.

"With so few consumers expecting conditions to turn around in the months ahead, the outlook for the economy continues to worsen and the risk of a recession continues to increase," says Lynn Franco, director of the Conference Board Consumer Research Center.

The findings are based on a survey of 5,000 households through Feb. 19. The Federal Reserve is closely watching consumer spending, which accounts for more than two-thirds of economic activity.

While the confidence figures don't necessarily predict a slowdown in spending, households are under stress from a slowing job market, sluggish wage growth, declining home equity and rising food and energy prices.

"The expectations number is what counts because it leads spending, and the drop to a 17-year low ... is absolutely disastrous," says Ian Shepherdson, chief U.S. Economist of High Frequency Economics.