Consumer confidence plunges
NEW YORK (AP) - February 26, 2008 The new reports Tuesday raised the threat of a return of
"stagflation," the economic curse of the 1970s in which economic
growth stagnates at the same time that inflation continues racing
ahead.
The 1 percent January jump in wholesale prices was led by a
surge in the prices of energy, food and prescription drugs and
followed a report last week that consumer prices had risen by a
bigger-than-expected 0.4 percent because of price pressures in the
same areas.
Over the past 12 months, wholesale prices rose by 7.4 percent,
the largest yearly gain since late 1981. Analysts warned consumers
to brace for more bad inflation news with crude oil prices rising
to records above $100 per barrel and with more evidence that the
prolonged jump in energy prices is starting to break out into more
widespread price problems.
Meanwhile, the New York-based Conference Board reported that its
confidence index fell to 75.0 in February, down from a revised
January reading of 87.3. The drop was far below what analysts had
forecast and put the index at its lowest level since February 2003,
a period that reflected anxiety in the leadup to the Iraq war.
A third report showed that home prices, measured by the
S&P/Case-Shiller Index, dropped by 8.9 percent in the fourth
quarter of last year, compared to the same period in 2006, the
steepest decline in the 20-year history of the index.
"Home prices across the nation and in most metro areas are
significantly lower than where they were a year ago," said Yale
University professor Robert Shiller, one of the index's creators.
"Wherever you look, things look bleak."
Analysts said rising inflation, slumping home prices, a
turbulent stock market and an economy flirting with a recession
were all combining to rattle consumers' nerves.
"There is no evidence that the recent collapse in consumer
confidence is going to turn around any time soon," said Brian
Bethune, senior economist at Global Insight. He said the drop in
confidence will lead to a cutback in consumer spending that will
trigger a brief recession in the first half of this year. And he
cautioned that "severe negative dynamics" at present could make
the forecast of a mild recession too optimistic.
However, Wall Street was able to shake off the spate of bad
economic news Tuesday, focusing instead on an announcement by IBM
of a $15 billion stock buyback program designed to boost its 2008
earnings. The Dow Jones industrial average was up more than 110
points in late-afternoon trading.
Private economists predicted further declines in housing prices
in the months ahead as the two-year housing slump continues with no
signs of a turnaround. The demand for homes is being constrained by
tighter lending standards imposed by financial institutions
suffering multibillion-dollar losses from soaring mortgage
foreclosures. Those foreclosures are dumping more homes back onto
an already glutted market.
RealtyTrac Inc., based in Irvine, Calif., reported that the
number of homes facing foreclosure climbed 57 percent in January
from the previous year and more lenders are being forced to take
possession of homes they can't unload at auctions.
The Bush administration insisted that the recently passed $168
billion economic stimulus bill, which will provide rebate checks to
millions of families and tax breaks to encourage business
investment, should stabilize the economy.
White House press secretary Dana Perino said President Bush had
been briefed on all the economic figures released Tuesday and was
closely following developments. "We're in a softening period,"
she said. "And the question is, how soft is it going to be and how
steep is the downturn going to be?"
Federal Reserve Chairman Ben Bernanke is scheduled to deliver
the central bank's twice-a-year economic report to Congress on
Wednesday, testimony that will be closely followed to see whether
the uptick in inflation will divert the Fed from what became in
January an aggressive rate-cutting campaign to combat a possible
recession.
Fed Vice Chairman Donald Kohn, in a speech Tuesday, said the Fed
remained concerned about the weak economy, signaling the
possibility of further rate cuts. While noting recent
"disappointing" news on inflation, he said, "I do not expect the
recent elevated inflation rates to persist," in part because the
slowing economy should ease pressure on wages.
The 1 percent jump in wholesale prices in January followed a 0.3
percent decline in December and a 2.6 percent spike in November.
The wholesale report said that energy prices jumped 1.5 percent,
as gasoline prices rose by 2.9 percent and the cost of home heating
oil soared by 8.5 percent. Food costs jumped by 1.7 percent, the
biggest monthly increase in three years.
Core wholesale inflation, which excludes food and energy, posted
a 0.4 percent increase, the biggest increase in 11 months and
double what analysts had expected. This gain was led by a 1.5
percent spike in the cost of prescription and nonprescription drugs
as well as higher costs for books, autos and plastic products.