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.

Underscoring that consumers are caught between slowing growth and rising prices, the U.S. Labor Department said in a report out Tuesday that wholesale inflation jumped 1% in January — about double the rate economists had predicted — and is up 7.4% in the past 12 months.

Prices for finished energy goods, measured by the producer price index, rose 1.5% in January, while food prices increased 1.7%, biggest rise in four years. From January 2007 to January 2008, prices for finished energy goods — gasoline, home heating oil, diesel fuel, for example — climbed 22.6%. The index for finished consumer foods advanced 8.3%.

Wholesale prices for unfinished and crude goods jumped an even larger amount in January, indicating more price pressures further down the pipeline. For example, wheat prices rose 6.6% in January, following a 22.6% surge in December.

And price pressures haven't abated in February. Prices for wheat, corn, soybeans and other grains have surged on futures markets in recent weeks, in response to rising demand and tight supplies. Even coffee prices are surging.

Wholesale prices do not automatically translate into rising consumer prices because businesses have limited ability to pass on their higher costs. But the consumer price index, a separate measure, has shown a rise in prices. The CPI has risen 4.3% the past 12 months. And food price inflation is the highest in 15 years.

"The Fed appears to be in the unenviable position of having to navigate the cross currents of accelerating inflation and diminishing growth prospects," says Kenneth Beauchemin, U.S. economist with economic analysis firm Global Insight.

Robert Shiller, one of the creators of the home price index, called the new reading for the October-December quarter "somber."

"Home prices across the nation and in most metro areas are significantly lower than where they were a year ago," said Shiller. "Wherever you look things look bleak."

Another housing index released by the Office of Federal Housing Enterprise Oversight (OFHEO) also posted the first yearly drop since 1991, albeit a smaller 0.3% dip from the fourth quarter of 2006.

As the bad news mounts, Democrats in Congress are calling for more vigorous action to address the slumping housing market. President Bush, however, said Tuesday that the economy should avoid a downturn. ?We?re not in a recession, I don?t think we will go in a recession. We?re in a slowdown, and there?s a difference," Bush told American Urban Radio Networks.