Reuters
March 29, 2008 - 12:00 a.m. EST

NEW YORK (Reuters) - Consumer confidence fell further into recessionary territory in March, hitting a 16-year low, even as other data showed incomes rose and inflation dipped in February, which should support the Fed's efforts to bolster the economy.

The Reuters/University of Michigan Surveys of Consumers said its final index of confidence fell to 69.5 in March -- its lowest since February 1992, when it was at 68.8 -- from the previous month's reading of 70.8.

Consumers were apparently unimpressed by February's 0.5 percent rise in personal incomes, reported by the Commerce Department. That exceeded forecasts of a 0.3 percent gain made by analysts polled before the release.

However, the best news from the U.S. personal income report may have been the benign reading on underlying inflation, which was 2 percent. This matched the prior month's gain, which was downwardly revised from 2.2 percent.

This latest reading on the "core" personal consumption expenditure price index is also just within the Federal Reserve's perceived comfort zone.

"It argues that the Fed can lower rates in the months ahead," Zach Pandl, economist at Lehman Brothers in New York, said about the core PCE price reading.

Many officials at the Federal Reserve, which has cut interest rates by 3 percentage points since mid-September in a bid to combat recession risks, have said they prefer to keep the core price gauge in a 1 percent to 2 percent range.

Earlier this week, the presidents of both the Dallas and Chicago Federal Reserve banks warned the central bank needs to be wary of a rise in inflation even as it navigates the United States through an economic slowdown.

The inflation reading provided a boost to Wall Street with the Dow Jones industrial average rising 0.4 percent. It also helped lift bond prices but pushed the dollar to near a record low around $1.58 per euro.

WEAKNESS

The Commerce Department's report also showed signs of economic weakness, with personal spending increasing just 0.1 percent in February. This was in line with expectations but is down from a 0.4 percent gain in January.

This weakness was consistent with the Reuters/University of Michigan Surveys of Consumers report, which said "it is now nearly unanimous among consumers that the economy has already entered a recession."

Its index of consumer expectations fell to 60.1, its lowest since January 1992, when it was at 59.1. In February this year it was at 62.4.

The report showed the final reading on one-year inflation expectations jumped to 4.3 percent in March from 3.6 percent in February.

That was the highest final reading since October 2005, when gasoline prices were soaring in the wake of Hurricane Katrina, but was down from the preliminary March reading of 4.5 percent.

Excluding the post-Katrina period, the March reading would be the highest since 1990.

The index of consumers' economic outlook for the next 12 months fell to 46 -- the lowest since a similar reading in January 1991 -- from 54 in February.

"Consumer confidence slipped due to growing concerns about weakening prospects for the economy as well as anticipated increases in unemployment and inflation during the year ahead," the Reuters/University of Michigan statement said.

The gloomy confidence data coincided with a disappointing outlook from department store retailer J.C. Penney Co Inc, which pushed shares of many retailers sharply lower.

"J.C. Penney counts half of American families as its customers, and they are feeling macro-economic pressures from many areas, including higher energy costs, deteriorating employment trends and significant issues in the housing and credit markets," Myron "Mike" Ullman, chairman and chief executive officer, said in a statement.

There was more dour economic news from the Economic Cycle Research Institute. Although its Weekly Leading Index (WLI) of future U.S. economic growth ticked up in the latest week, as did its annualized growth rate, both still show the U.S. economy headed for recession.

"With growth in the WLI having stabilized around recessionary readings, the economy remains locked on the recession track," said Lakshman Achuthan, managing director at ECRI.