Consumer prices and industrial production tumbled in the U.S. as a record slide in retail sales destroyed companies’ pricing power and idled more than a quarter of factory capacity.
The cost of living fell 0.7 percent in December, capping the smallest annual increase since 1954, the Labor Department said today in Washington. Industrial output shrank 2 percent, and the capacity-utilization rate slid to 73.6 percent, the Federal Reserve said. A private survey showed consumer sentiment little changed in January.
The figures indicate a deepening threat to earnings at businesses from manufacturers to retailers. A survey of chief executive officers today showed the lowest level of confidence in at least three decades. Further declines in prices would raise the danger of deflation, which would deepen the recession by making debts harder to pay off.
“Companies in many different areas are cutting prices in order to try to preserve business,” said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts. “We don’t have evidence yet that the rate of decline” in the economy is slowing, he said.
Treasuries, which fell earlier today on concern about the rising cost of government bailouts of financial companies, remained lower after the reports. Yields on benchmark 10-year notes rose to 2.32 percent at 2:51 p.m. in New York, from 2.20 percent late yesterday. The Standard & Poor’s 500 Stock Index rose 0.2 0.6 percent to 845.69.
Consumer prices were forecast to fall 0.9 percent, according to the median estimate of 80 economists in a Bloomberg News survey. Projections ranged from declines of 0.4 percent to 1.5 percent.
For all of 2008, prices rose 0.1 percent after increasing 4.1 percent the previous year.
Terry Lundgren, chief executive officer of Macy’s Inc., the U.S.’s second-largest department store, said he expects the company “will continue to be promotional for a very long time” after Macy’s cut prices as much as 75 percent in a sale on Jan. 10.
Alcoa Inc., the world’s largest aluminum maker, last week reported a third major production cut in as many months and said it will reduce its global workforce by 13,500 after demand for the metal used in automobiles and appliances plunged.
Consumer prices excluding food and energy were unchanged in December for a second month and up 1.8 percent last year, the smallest annual increase since 2003. Over the last three months, the rate is falling at an annual rate of 0.3 percent.
Fed Bank of San Francisco President Janet Yellen warned yesterday it’s “not acceptable” for policy makers to allow inflation to fall “to levels that are unhealthy.”
Energy costs dropped 8.3 percent last month and were down 21 percent for the year, the biggest decline since those records began in 1958. Gasolineprices decreased 43 percent in 2008, also the biggest decline on record going back to 1937.
Food prices, which account for about a fifth of the CPI, decreased 0.1 percent, led by a 2.4 percent drop in the cost of fruits and vegetables.
Prices for clothing, new automobiles, airline fares and recreation all decreased last month. For all of 2008, the 3.2 percent drop in new-car prices was the biggest since 1971.
The Fed’s production report showed factory output alone decreased 2.3 percent, led by a 7.2 percent decline in autos and parts. Automakers assembled cars and light trucks at an annual rate of 6.43 million during the month, the fewest since 1982.
The Reuters/University of Michigan preliminary index of consumer sentiment rose to 61.9 from 60.1 in December.
“The current level of consumer confidence already indicates a deep and long recession is expected by consumers,” Richard Curtin, director of the survey, said in a statement.
President George W. Bush’s top advisers cut their forecasts for growth in the economy and painted a bleak unemployment picture in a report released today. The economy will expand 0.6 percent this year and 5 percent in 2010, Edward Lazear, the White House chief economist, said in the president’s annual economic report. The unemployment rate will average 7.7 percent in 2009 and inflation is projected to average 1.7 percent.
Business leaders are also glum. Confidence among chief executive officers dropped in the fourth quarter to the lowest level in at least three decades of record keeping, according to a report today from the Conference Board, a New York-based research group. Only 11 percent of those polled said economic conditions are likely to improve in the next six months.
Retail sales fell 2.7 percent in December, the sixth consecutive drop and extending the longest string of declines on record, the government said Jan. 14.
“Overall inflation has already declined significantly and appears likely to moderate further,” Fed Chairman Ben S. Bernanke said in a Jan. 13 speech in London. “At this point, with global economic activity weak and commodity prices at low levels, we see little risk of inflation in the near term.”
President-elect Barack Obama is seeking to halt the economy’s decline with a stimulus plan that includes tax cuts, aid to states to sustain government healthcare programs and spending on roads, schools and the energy network. House lawmakers this week began work on an $825 billion package.