May 16, 2008 / 12:33 PM / 12 years ago

Consumers' mood as grim as early-80s

NEW YORK (Reuters) - U.S. consumer confidence tumbled to a 28-year low this month as rising prices strained household finances, while another drop in single-family housing starts underscored problems still plaguing the economy.

Consumer sentiment plunged in May to the lowest since June 1980 thanks largely to soaring food and fuel prices, according to the latest Reuters/University of Michigan survey of consumers. REUTERS/Graphics

Friday’s reports highlighted worries that the United States could be entering the early days of a period of stagflation like the late 1970s and early 1980s, characterized by a sluggish economy and accelerated price growth.

The data showed consumers’ short-term inflation expectations hit a 26-year high, heightening the dilemma facing the Federal Reserve, which has bet that a slow economy will tame prices.

“The Fed has continuously said they want to contain inflation expectations — and they are not contained,” said Tom Sowanick, chief investment officer at Clearbrook Financial LLC in Princeton, New Jersey.

“The Fed is going to have to address inflation expectations in some manner, whether they talk it down or they force it down, possibly by taking away the aggressive rate cuts over the last year.”

Stocks ended little changed another record high in oil prices helped energy shares, though it reminded investors of inflation worries. The bond market, which abhors inflation, ended lower.

The Fed has slashed its target for the benchmark overnight federal funds rate by 3.25 percentage points since crises in the housing and credit markets last year pushed the economy toward recession. The rate cuts are a textbook response to the threat of recession, but the opposite strategy used to fight inflation.

GRIM MOOD

The Reuters/University of Michigan index of consumer confidence certainly highlighted the threat to economic growth, dropping to 59.5 in May — the lowest level since June 1980.

This is bad news for the United States, where consumers fuel two-thirds of national economic activity through their purchases of goods and services.

“Consumer confidence continued to slip in early May due to surging food and fuel prices,” the Surveys of Consumers statement said. “Record numbers of consumers viewed the economy in recession and saw little hope of recovery anytime soon.”

This took the shine off news from the Commerce Department that starts on new U.S. homes rose by a surprisingly strong 8.2 percent in April, the biggest monthly increase in more than two years. The bounce, however, came entirely from multiple-unit dwellings such as apartments and condominiums.

Applications for new building permits also turned up for the first time in five months, presenting another rare bit of good news for the beleaguered U.S. housing market, the original source of the economy’s current troubles.

In a sign that housing’s woes were not yet over, groundbreaking on single-family homes in the United States dropped to the slowest pace since 1991.

Meanwhile, the Michigan report’s gauge of one-year inflation expectations surged to 5.2 percent — the highest since February 1982 — from 4.8 percent in April.

Also worrying for policy-makers at the Federal Reserve, five-year inflation expectations were the highest since August 1996, edging up to 3.3 percent from April’s 3.2 percent.

The inflation measures challenge the Fed’s view that soaring commodity prices have not yet led to an increase in long-term expectations for price growth.

The president of the Federal Reserve Bank of Atlanta, Dennis Lockhart, acknowledged inflation was a problem.

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“Inflation has been elevated since mid-decade, basically since 2005. For my own comfort zone, it is at an uncomfortable level,” he told CNBC television in an interview.

“My base-case forecast is that the weak economy will bring inflation down. And in fact, if you look at some of the information, the data we’ve seen in the last couple of cycles ... it has slowed,” said Lockhart, who is not a voting member of the Fed’s interest rate-setting committee this year.

Additional reporting by Glenn Somerville in Washington, Jennifer Ablan in New York; Editing by Jonathan Oatis

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