U.S. Economy: Confidence Falls, Producer Prices Rise (Update1)

By Courtney Schlisserman and Bob Willis


Feb. 26 (Bloomberg) -- U.S. consumer confidence fell to the lowest level in five years and wholesale inflation picked up, limiting the Federal Reserve's room to maneuver as it tries to avert a recession.

The Conference Board's index of confidence dropped to 75.0 in February, lower than forecast, from 87.3 in January, the New York-based group said today. The Labor Department reported that producer prices rose 1 percent last month. Excluding food and energy, expenses climbed 0.4 percent, the most in almost a year.

Consumers, whose spending accounts for most of the economy, are being buffeted by lower home values, rising unemployment and elevated gasoline and food prices. Fed Vice Chairman Donald Kohn, speaking today ahead of Chairman Ben S. Bernanke's Congressional testimony tomorrow, signaled the central banker is willing to keep interest rates low to revive the economy.

``It's maybe a mini bout of stagflation and it's troubling,'' Nigel Gault, chief U.S. economist at Global Insight Inc. in Lexington, Massachusetts, said in an interview on Bloomberg Television in New York. ``It does limit the extent to which the Fed's going to be able to act further.''

Home prices in 20 U.S. cities fell in December by the most on record, a separate report showed today. The S&P/Case-Shiller home-price index dropped 9.1 percent from a year ago, after a 7.7 percent decrease in November. Home Depot Inc., the world's largest home-improvement retailer, today said fourth-quarter profit fell and forecast earnings below analysts' estimates.

``Consumers are feeling beset on all fronts,'' said Gault.

Market Reaction

Stocks fell, before recouping losses later, government bonds rose and the dollar extended its decline. The Standard & Poor's 500 Index dropped as much as 0.6 percent before trading little changed at 1,371.14 at 11:10 a.m. in New York. Ten-year note yields fell to 3.86 percent from 3.90 percent late yesterday and the dollar lost 0.4 percent to $1.4884 per euro.

Economists expected the Conference Board's measure would fall to 82 from a previously reported 87.9, according to the median of 66 forecasts in a Bloomberg News survey. Estimates ranged from 76.3 to 87.

The share of consumers who said jobs are plentiful declined to 20.6 percent, from 23.8 percent last month. Those saying jobs are hard to get increased to 23.8 percent from 20.6 percent a month ago.

The proportion of people who expect their incomes to rise over the next six months decreased to 17.0 percent from 18.1 percent. The share expecting more jobs dropped to 9 percent from 10.5 percent.

`Tough Spot'

``The consumer's been in a tough spot for a while now and it seems like the years of elevated oil prices and weakening housing market are starting to catch up in the sentiment numbers, especially now that we have the employment situation trending downward,'' said Ryan Reed, an economist at National City Corp. in Cleveland. He forecast confidence would fall to 76.3, the lowest projection in the Bloomberg survey.

Kohn today said turmoil in credit markets and the possibility of even slower economic growth pose a ``greater threat'' than inflation.

``I do not expect the recent elevated inflation rates to persist,'' Kohn said in the text of a speech to the University of North Carolina, Wilmington. ``The adverse dynamics of the financial markets and the economy have presented the greater threat to economic welfare in the United States.''

Mishkin's Concern

Other Fed officials, including Governor Frederic Mishkin yesterday, have warned that higher prices may stoke inflation expectations.

Combined with figures last week showing consumer prices also rose more than forecast, today's producer-price report may prevent prompt the Fed to consider raising rates as soon as the economy stabilizes.

``What you've got is a lot of inflationary pressures building,'' said Roger Kubarych, chief U.S. economist at Unicredit Global Research in New York, who correctly forecast the rise in core prices. For now, ``the Fed will put them in second position in terms of priority until this financial strife settles down,'' he said.

Over the past 12 months, producer prices rose 7.4 percent, the most since October 1981. Wholesale prices excluding food and energy advanced 2.3 percent in the year through January.

The median forecast of 70 economists in a Bloomberg News survey was for wholesale prices to rise 0.4 percent from December. Core prices were expected to advance 0.2 percent, according to the survey median.

Food Costs Escalate

Energy costs increased 1.5 percent after falling 3 percent in December. The price of gasoline rose 2.9 percent. Food prices climbed 1.7 percent, the most since October 2004. Crude food prices, which cover costs of corn and wheat, increased 2.7 percent.

Kellogg Co., the largest U.S. cereal maker, last week affirmed its 2008 profit forecast after boosting prices to counter rising wheat and energy costs.

``Unprecedented commodity and energy inflation'' forced Battle Creek, Michigan-based Kellogg to raise prices, Chief Executive Officer David Mackay said at conference in Boca Raton, Florida. The increases were ``across our global portfolio and across almost all segments.''

Fed officials last month cut their forecast for U.S. growth this year to a range of 1.3 percent to 2 percent, from 1.8 percent to 2.5 percent predicted in October. Two members of the National Bureau of Economic Research's business cycle dating committee, the panel charged with dating U.S. economic cycles, said last week that it's too early to decide whether the U.S. is in recession.

Fed Policy

Fed policy makers last month lowered their benchmark rate by 1.25 percentage point to 3 percent, including a three- quarters-of-a-point cut in an emergency meeting on Jan. 22. Central bankers are scheduled to next vote on the direction of interest rates March 18.

Higher energy and food bills also are hurting consumers' outlooks and their ability to spend on non-essential items. The amount of Americans must spend each month on debt service, housing, medical care, food and energy rose to 66.9 percent of their total spending in December, the highest since record- keeping began in 1980, according to Bloomberg figures.

Consumers are scaling back spending. Retail sales excluding automobiles and gasoline were unchanged in January, the Commerce Department reported on Feb. 13.

In December, consumer spending, which makes up about 70 percent of gross domestic product, grew at the slowest pace in six months. The government is scheduled to release its January report on spending on Feb. 29.