Consumer sentiment, regional factories sound recession bell

NEW YORK (Reuters) - The alarm bells of U.S. recession rang louder on Friday as reports showed business activity in the U.S. Midwest plummeted in February and consumer sentiment slumped to a 16-year low.

More grim news poured in from the inflation front, with government data indicating consumers were struggling in January to keep ahead of robust price growth, which remained uncomfortably high by standards normally associated with the Federal Reserve.

The National Association of Purchasing Managers-Chicago said its index of regional business conditions tumbled to 44.5, its lowest since December 2001, from 51.5 in January. The result was well below the level of 50 that separates growth from contraction.

"It looks like there's been a reversal of fortune for the manufacturing sector from last month and the economy appears to have fallen off a cliff," said Chris Rupkey, senior financial economist, Bank of Tokyo/Mitsubishi, New York, referring to the Chicago PMI report.

"This is just the latest piece of evidence that the U.S. economy is teetering on the edge of recession."

Economic concerns pushed stocks .DJI down sharply while the dollar was stuck near three-year lows against the yen.

Government bond prices, which usually benefit from signs of economic weakness, rallied.

The Reuters/University of Michigan Surveys of Consumers said its main index of consumer sentiment fell to 70.8 in February from 78.4 in January and was the lowest since February 1992.

A measure of consumers' expectations also hit a 16-year low while worries about their ability to makes ends meet and the overall economy were as bad as they have been in decades, the Reuters/University of Michigan Surveys of Consumers said.

"Consumer confidence remained at the same low level that was recorded during the recession periods of the mid-1970s, the early 1980s and the early 1990s," the Reuters/University of Michigan Surveys of Consumers said in a statement.

Some economists believe that a rapid deterioration in economic data suggests the recession has arrived and Federal Reserve Chairman Ben Bernanke noted this week that the risks to softer growth were tilted to the downside.

The Chicago PMI release comes after regional manufacturing reports have suggested the onset of recessionary conditions in the factory sector.

The results have driven expectations that next week's national gauge of manufacturing from the Institute for Supply Management will show a contraction.

Many analysts consider the NAPM-Chicago survey a factory report since the region is relatively industrialized. But service sector companies and non-profits are polled too.

U.S. consumer spending rose more than expected in January, but the gain was eaten up by swiftly rising prices, the government said in a report that underscored the pressure households face.

The Commerce Department said personal spending rose 0.4 percent last month, while personal income increased by 0.3 percent.

When adjusted for inflation, however, spending was unchanged, due largely to rising food and energy costs.

The personal consumption expenditure price index, a key inflation gauge, rose 2.2 percent year-over-year when food and energy items are excluded. This matched the prior month's "core" inflation rate but remained above the Fed's perceived comfort zone, which tops out at about 2 percent.

The University of Michigan report showed rising prices were a concern for consumers and one-year inflation expectations jumped to 3.6 percent from 3.4 percent in January.

The rise in inflation expectations could complicate the Federal Reserve's ability to cushion the economy's fall, and is one of the many factors worrying consumers.

"Expectations for personal finances as well as for the entire economy are now as pessimistic as any time during the past quarter century," the University of Michigan report said.

(Additional Reporting by David Lawder in Washington; Ellen Freilich and Pedro Nicolaci da Costa in New York; Editing by Tom Hals)