The Economy: A Mix of Bad News

The latest reports on wholesale inflation, consumer sentiment, and home prices show just how deeply the pain is spreading

Shoppers line up to check out at a Target store in Chicago. Consumer confidence is at its lowest level since 1993, according to the Conference Board. Scott Olson/Getty Images

By BusinessWeek, Standard & Poor's, and Action Economics staff

A series of economic reports released Feb. 26 delivered bad news on wholesale inflation, housing prices, and the mood of the consumer, offering a stark display of the range of problems faced by the U.S. economy.

The real attention-getter was an outsized increase in the producer price index (PPI) for January. The headline PPI jumped 1.0% on the month, and rose 0.4% excluding food and energy prices. The readings were much more than economists' consensus expectation of increases of 0.3% for the headline and 0.2% for the core.

Price Hikes

Among the chief culprits: Food prices jumped 1.7%, following the 1.4% December hike, and are up 8.3% from a year ago, reflecting bad weather especially in Southern California. Energy prices rose 1.5% in January and are up 22.6% on the year.

The total PPI is now up 7.4% from a year ago, and 2.3% excluding food and energy.

The data confirm the acceleration of inflation seen in the CPI, and spotlight the Fed's dilemma in fighting recession while dealing with the upward creep in inflation, says S&P Economics. S&P still expects another rate cut by the Federal Reserve at its March policy meeting. "[B]ut unless inflation subsides, that will probably be all."

Ongoing strength in headline inflation and the continued upward drift in core rates should keep policymakers hobbled by inflation risk, despite the greater focus at the Fed on the slowing trajectory for growth, says Action Economics. Inflation fears are still intact at the Fed even if they are on the back burner for now, says Action.

Confidence Shaken

Meanwhile, distress signals are emanating from another corner of the U.S. economy: The Conference Board reported that its survey of consumer confidence plunged to 75.0 in February from 87.3 in January. Economists' consensus view was for a smaller decline, to 82.0. The index is at the lowest level since 1993.

Consumers' assessment of current conditions fell to 100.6 from 114.3, while expectations plummeted to 57.9 from 69.3.

"The consumer depression is further evidence that spending will weaken, and that the economy is likely to remain in recession," says S&P Economics.

The mix of hotter inflation and weaker consumer sentiment leave "a bad day of reports" for Fed Chairman Ben Bernanke as he prepares his comments for his Feb. 27 testimony before Congress, according to Action Economics. "The Chairman will need to gingerly navigate the waters of appearing focused on the risks facing the economy while not appearing too glib with regard to the obvious inflation threat that the Fed now faces."

More Housing Woes

Finally, news on the housing sector released Feb. 26 offered another gloomy view. The S&P/Case-Shiller home price index, which covers 20 U.S. cities, dropped 9.1% from a year earlier in December, more than the 8.2% expected by economists and the 7.7% year-over-year November drop. The national index dropped 8.9% year-over-year in the fourth quarter.

Only three cities showed a year-over-year increase in December—Charlotte, N.C., Seattle, and Portland, Ore. The biggest declines continued to be in the Sunbelt cities, with Miami down the most (17.5%). The problems are spreading northward, notes S&P Economics, with San Francisco, which had been relatively stable, down 10.8%.

"As always, winter housing data are suspect, but the downward trend remains clear," says S&P. "The data are more evidence that the housing crisis is still getting worse, despite the encouraging existing home sales report" released Feb. 25.