Data paint dark picture of economy

WASHINGTON —  Consumer confidence slid to its lowest level in 16 years, factory output went flat and there were signs of a pick-up in inflation, according to data released Friday -- an ominous combination for an economy on the verge of recession.

Slowing growth coupled with sharply rising prices is particularly challenging for policymakers because the main tool used to stimulate the economy -- cutting interest rates -- tends to fuel inflation.

The more immediate concern is growth, or a lack of growth, in economic activity. Because spending by individual Americans accounts for two-thirds of that activity, economists are eager to learn how confident consumers are feeling, which may signal whether they are in a buying mood or are pulling in their horns.

In a clearly downbeat sign, the Reuters/University of Michigan index of consumer sentiment this month fell much more than expected to its lowest level since February 1992.

Meanwhile, the government’s report on industrial production in January showed a weak 0.1% increase for the second consecutive month. And an index of manufacturing activity in New York state signaled contraction for the first time since May 2005, according to the Federal Reserve Bank of New York.

“We’ve started 2008 with very little momentum, if any,” said Alan Gayle, chief investment strategist at Trusco Capital Management in Atlanta.

“There’s a lot of talk right now about whether growth is slightly negative or slightly positive, but it’s a distinction without a difference,” Gayle said. “This economy is soft.”

The confidence and industrial output data helped hold down the stock market Friday. The Dow Jones industrial average fell 28.77 points, or 0.2%, to 12,348.21. The Standard & Poor’s 500 index edged up, while the Nasdaq composite index lost 0.5%.

Complicating the problem, U.S. import prices skyrocketed last month from December because of higher energy and food costs, and marked a record increase from a year earlier, the Labor Department said Friday. That, along with signs in the consumer survey that Americans are starting to worry about higher prices, is bad news for the Fed, which is trying to quash recession and a freeze-up of financial markets by slashing interest rates, the very thing that can send prices flying.

In congressional testimony Thursday, Fed Chairman Ben S. Bernanke said that inflation, though running above levels of a year ago, remained in check. But he acknowledged that if inflation or people’s expectations about inflation picked up, that eventually could make it harder to trim interest rates.

“Any tendency of inflation expectations to become unmoored or for the Fed’s inflation-fighting credibility to be eroded could . . . reduce the central bank’s policy flexibility to counter shortfalls in growth in the future,” he told the Senate Banking Committee.

What people think inflation will do is considered important because it can become a self-fulfilling prophecy, helping to drive prices in the very direction people think they are going to head.

Although Bernanke described inflation expectations as “relatively well-anchored,” the Reuters/University of Michigan survey found that Americans on average expected inflation of 3.7% over the next year, up from an average of 3.4% in January.

The survey’s index of consumer sentiment, meanwhile, fell to 69.6 this month from 78.4 in January. The survey asks people to assess the conditions they expect in the future as well as current conditions. During economically unsettled times, there is often a split decision, with respondents painting a dark picture of their immediate prospects but a sunnier portrait of things to come.

In the latest survey, however, consumers said they were deeply gloomy about the present and the future. The survey’s future index, which hovered at levels far above 100 during the best of the 1990s, was at 59.4 this month, down from 68.1 last month.

The new confidence numbers square with other polling results showing a sharp downturn in people’s assessments of economic conditions since the start of the month. In the latest survey by the nonpartisan Pew Research Center, a majority of Americans described their own financial situations as only fair or poor, and 58% said their incomes were being outstripped by the cost of living. Another finding: Eighty-two percent of those surveyed believe that a recession is somewhat or very likely within the next year.

The Labor Department’s report on trade prices showed that import prices leaped 1.7% in January after falling 0.2% in December. They were up 13.7% from January 2007, the largest jump since the government began keeping records in 1982.

Oil prices led the way, up 5.5% for the month, and 66.9% for the year, the sharpest annual increase since October 2004. Excluding oil, import prices rose 0.6% in January from December and 3.6% from January 2007.

Prices of goods imported from China in January jumped 0.8% from December and 3.3% from a year earlier, both records. The increases suggested that the U.S. can no longer count on holding prices down by importing cheap goods from China. The price of goods imported from the European Union climbed at an even faster rate of 1.1% last month from the month before.

Over the next two weeks, the government will issue its broadest gauges of inflation trends, the consumer price index and the producer price index. Although the consumer index jumped 4.1% in 2007, the most in 17 years, the two indexes have generally shown the economy to be resisting the steady surge of energy and import prices.

The slowdown in industrial production in a report from the Federal Reserve bore the marks of the nation’s housing contraction. Production of construction supplies fell 1.1% in January, according to the Fed. The decline in residential building shaved a full point off economic growth last year, the most since 1980.

There have been few signs that the housing slump will bottom out any time soon. Contractors started new homes at an annual pace of 1.006 million in December, the slowest pace since the beginning of the 1990s. The National Assn. of Realtors said this week that the median price of existing single-family homes fell to $206,200 in the fourth quarter, down 5.8% from a year earlier.

That drop in home prices might be the steepest since the Great Depression, some analysts said.

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peter.gosselin@latimes.com