U.S. Economy: Confidence Drops, Factories Stagnate (Update2)

By Bob Willis and Courtney Schlisserman


Feb. 15 (Bloomberg) -- Confidence among American consumers slumped to the lowest level since 1992 and factory output failed to increase, indicating the damage from the housing contraction is pushing the economy toward a recession.

The Reuters/University of Michigan index of consumer sentiment fell to 69.6 in February from 78.4 the previous month. The Federal Reserve said manufacturing production was unchanged in January after two months of gains, while a gauge of activity at New York factories contracted this month.

``We're seeing a clear pattern of sudden weakening in both consumer and business confidence, which frankly is the sign of a recession,'' said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut, who had the closest forecast for consumer sentiment in a Bloomberg News survey.

U.S. government bonds rallied after the figures, sending two-year note yields to the lowest level since 2004, while the dollar dropped. The reports reinforced traders' anticipation that the Fed will need to cut interest rates by at least a half- point by the end of the March 18 meeting.

Best Buy Co., the largest U.S. consumer electronics chain, today cut its full-year earnings forecast. ``Soft domestic customer traffic in January, coupled with our near-term outlook, now indicate that our fourth-quarter revenue will fall short of our planned targets,'' Chief Executive Officer Brad Anderson said in a statement.

Waterford Warning

Waterford Wedgwood Plc, the Dublin-based maker of Royal Doulton crystal and china, today forecast its sales will fall 4 percent this year, due to weaker consumer spending in the U.K. and the U.S.

The reading on consumer sentiment was the weakest since February 1992. Economists had forecast the measure would fall to 76, according to the median of 66 projections in a Bloomberg News survey.

The decline in confidence indicates that pledges of tax rebates and lower interest rates failed to ease Americans' concerns about falling home and stock prices and rising unemployment. President George W. Bush this week signed a $168 billion stimulus package, including tax rebates to more than 130 million households, after a deal with Democratic lawmakers.

``We're starting '08 with modest, if any, economic momentum,'' Alan Gayle, senior investment strategist at Trusco Capital Management in Richmond, Virginia, said in an interview with Bloomberg Television.

Two-year note yields dropped as low as 1.82 percent, and were at 1.91 percent at 4:02 p.m. in New York. Interest-rate futures show the chance of a three-quarter point Fed rate cut, to 2.25 percent, by March rose to 32 percent from 30 percent yesterday.

Dependent on Utilities

Total industrial output rose 0.1 percent for a second straight month, matching economists' forecasts, the Fed said today. Production was held up by unusually cold weather that spurred utility use. Manufacturing, which accounts for four fifths of industrial production, was unchanged from December after a 0.2 percent gain.

The Federal Reserve Bank of New York's general economic index fell to minus 11.7, the first negative reading since May 2005, from 9.0 in January, the bank said today. Readings below zero for the so-called Empire State index signal contraction.

Fed Chairman Ben S. Bernanke yesterday told lawmakers that the central bank is ready to act ``as needed'' to address risks to growth. His predecessor, Alan Greenspan, told an audience in Houston late yesterday that ``we are clearly on the edge.''

`Clearly Struggling'

``Manufacturers are clearly struggling under the pressure of slower consumer demand and a much more cautious corporate sector,'' said Russell Price, senior economist at H&R Block Financial Advisors in Detroit. ``Exports are still a positive for the sector but clearly they are not enough to offset these other factors. The Fed still has more work to do.''

Production of construction supplies dropped 1.1 percent in January, today's Fed report showed. Residential building subtracted 1 percentage point from economic growth last year, the most since 1980.

Reports this year indicate the housing slump is continuing. Builders broke ground on 1.006 million homes at an annual rate in December, the fewest since 1991. The National Association of Realtors said last month sales of existing homes fell more than forecast in December, while prices of single-family homes posted the biggest annual drop probably since the Great Depression.

Capacity Use

Capacity utilization, which measures the proportion of plants in use, was unchanged in January at 81.5 percent, today's report showed. Capacity utilization was forecast to fall to 81.3 percent. The rate has averaged about 81 percent over the last 30 years. Higher rates raise the risk of bottlenecks in production that can push up prices.

Utility production rose 2.2 percent after falling 0.2 percent, the report showed. The average temperature in January was 30.5 degrees Fahrenheit, 0.3 degree below the mean for that month in the 20th century, according to the National Climatic Data Center in Asheville, North Carolina. The Northeast was hit by blizzard conditions at the end of the month.

Economic growth slowed to a 0.6 percent pace in the fourth quarter, and the economy lost jobs in January for the first time in more than four years. Economists surveyed by Bloomberg News this month indicated even odds that the economy will enter a recession this year.

Citing a worsening outlook, the Fed lowered its benchmark interest rate by 1.25 percentage point during two meetings over nine days in January, the fastest rate reduction since the federal funds rate became the main policy tool around 1990.

Car Sales

Cars and light trucks sold at a 15.2 million annual pace in January, the worst showing since October 2005, industry figures showed. Economists for General Motors Corp., Ford Motor Co. and Chrysler LLC said Jan. 15 that U.S. sales of cars and light trucks may fall for a third straight year in 2008.

``This is going to be a challenging year for the auto industry,'' said Paul Traub, a Chrysler economist, at a conference in Detroit last month.

Delinquency rates on U.S. auto loans in asset-backed securities rose in January to the highest levels in 10 years, Fitch Ratings said. Delinquencies for subprime auto loans reached 4.03 percent, a 43 percent increase from a year earlier, the Chicago-based ratings company said in a report yesterday.

Exporters Benefit

Exporters are helping to keep manufacturing from a deeper slump. General Electric Co. said fourth-quarter profit rose 15 percent on higher international sales of jet engines and power- plant turbines, drawing more than half its annual revenue from overseas for the first time.

GE Chief Executive Officer Jeffrey Immelt's push into global markets was led by a 30 percent jump in the GE Infrastructure group's sales, as developing countries built cities, hospitals and airports, and the dollar weakened.

``Every place we went there's a need for power, there's a need for planes, there's lots of capital being invested, and there's just no sign this global infrastructure boom is slowing at all,'' Immelt told a conference call Jan. 18.