U.S. consumers, economists unanimously grim

NEW YORK Fri Feb 13, 2009 11:40am EST

A man stands with his shopping cart at a Home Depot in New York, August 18, 2008. REUTERS/Shannon Stapleton

A man stands with his shopping cart at a Home Depot in New York, August 18, 2008.

Credit: Reuters/Shannon Stapleton

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NEW YORK (Reuters) - U.S. consumers and professional forecasters have cast off the last remnants of economic optimism, reports showed on Friday, as they confronted the grim reality of a long and deep recession.

The U.S. economy will shrink a whopping 5.2 percent in the first quarter on an annualized basis, its worst performance since 1982, according to a quarterly forecasting survey published by the Philadelphia Federal Reserve.

U.S. consumer confidence fell to its lowest in three months in February as sentiment grew increasingly gloomy over an economic downturn that most expect to last up to five years, according to the Reuters/University of Michigan Surveys of Consumers.

"Confidence fell in early February as consumers came to the consensus that the economy would remain in recession throughout 2009," the report said.

"Moreover, nearly two-thirds anticipated that the downturn would last five more years."

The Reuters/University of Michigan Surveys of Consumers said its index reading of confidence for February tumbled to 56.2 from 61.2 in January.

That was the lowest since November, when U.S. stocks hit 11-year lows during one of the worst periods of the current financial crisis. A separate reading in the report showed consumer expectations fell to their lowest since May 1980.

DISAPPOINTING

U.S. stocks lost more ground immediately after the surprisingly weak consumer sentiment report, but they later clawed back.

Government bonds, a safe haven for financial markets during times of economic turmoil, pared their earlier losses but still kept a decidedly negative tone on worries over high levels of government borrowing.

The main confidence index was well below economists' median expectation for a reading of 61.0 culled from 60 forecasts in a Reuters poll that ranged from 56.5 to 64.0.

The University of Michigan confidence index dates back to 1952. Currently it is still near the record low of 51.7 that it hit in May 1980, when the U.S. economy was mired in one of the worst downturns since the Great Depression.

The index managed to gain in December and January, but February's fall suggested the recovery -- or bottoming at least -- that many economists had hoped for is now in danger.

"The index was disappointing, reversing all the gains of the past two months," said Cary Leahey, economist at Decision Economics in New York.

Reflecting the grim mood, the index measuring consumers' view of the 12-month economic outlook fell to its lowest ever.

The February report showed mixed views on inflation.

One-year inflation expectations plummeted to 1.6 percent from January's 2.2 percent for the lowest since November 2001, highlighting worries that the United States might be headed for a deflationary period of falling prices, wages and economic activity.

However, five-year inflation expectations edged up to 3.0 percent from January's 2.9 percent.

That was the highest since September 2008 and is consistent with concerns of some in the financial markets that massive spending and borrowing by the government to bail out the economy might prove inflationary.

CLOUDS IN THE CRYSTAL BALL

In the Philadelphia Federal Reserve's previous survey, economists had foreseen an annualized decline of just 1.1 percent in first quarter U.S. gross domestic product.

The pain is now expected to last longer than before. The economy was seen shrinking an additional 1.8 percent in the second quarter, bringing the jobless rate to 8.3 percent. Previously forecasters believed GDP might eke out some growth in that quarter, about 0.8 percent.

A separate measure of U.S. future economic growth slipped further along with its annualized growth rate in the latest week, indicating a hazy reading of economic recovery, according to the Economic Cycle Research Institute research group.

According to Lakshman Achuthan, managing director at ECRI: "With...growth falling once again, a business cycle recovery remains elusive."

(Additional Reporting by Camille Drummond, Ellen Freilich, Pedro Nicolaci da Costa)

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