Consumers' Mood Brightens, Prices Muted

U.S. consumers became more optimistic in December, brushing away concerns about possible war with Iraq and a rising jobless rate and boosting retailers' hopes for a joyous holiday shopping season.

A series of private and government reports on Friday offered hints of brighter economic prospects as wholesale prices remained well in check in November, and a closely watched gauge of consumer confidence moved higher this month.

The University of Michigan consumer sentiment index climbed to 87.0 in December from a final reading of 84.2 in November, according to market sources who saw the subscription-only survey. December's reading was the highest level in four months, nearing the 87.6 level seen in August. It topped consensus forecasts for a rise to 85.0.

The U.S. Labor Department said producer prices declined in November, largely because of lower energy and car prices. The producer price index, a gauge of prices at the factory and farm gate, dropped 0.4 percent after a big 1.1 percent increase in October.

The November fall in PPI was the largest since a matching 0.4 percent dip in May. Excluding volatile food and energy prices, the so-called core index fell 0.3 percent after a 0.5 percent advance in October.

Ringing Registers

A third report, from the Commerce Department, pointed to modestly upbeat hopes for a good shopping season in the crucial Thanksgiving-to-Christmas period, which many retailers rely on for the bulk of their yearly business.

Commerce said a buildup of stocks on retailers' shelves pushed the value of October business inventories up 0.2 percent in October to $1.134 trillion after a 0.6 percent gain in September. Sales by retailers, wholesalers and manufacturers rose 0.4 percent in October after a decline in September.

"Retailers were building up stocks ahead of the holiday shopping period but only very modestly," said Mark Vitner, Wachovia Bank in Charlotte, N.C..

If businesses were being wary in October, analysts said the December consumer sentiment figures should be bracing.  

"This is good news, coming at the best of possible times for retailers," said Christopher Low, chief economist at FTN Financial in New York. "Consumers are already spending more than they did in the late third quarter, especially on things other than autos, and this report suggests further improvement in the last month of the quarter."

Despite the positive report on sentiment, which implied consumers likely will keep adding their spending power to the economy, financial markets remained in the doldrums.

The Dow Jones industrial average closed 1.22 percent lower at 8433.85 and the technology-laden Nasdaq composite index closed about 2.64 percent lower 1362.58.

Analysts said the producer price report underlined there were little or no price pressures in the U.S. economy — so little in fact that businesses were not boosting production because their profits remain pinched.

Too Much Capacity

"This report reflects disinflation and brings attention to the fact that expenditures are not growing rapidly enough to put existing production capacity to profitable use," said John Lonski, chief economist at Moody's Investors Service.

A few components of the index pointed to a promising pickup in activity.

"However, within the report, there was a steep jump in crude commodity prices owing to a possible pickup in world industrial activity," he added. "In the past, the faster growth of core crude commodity prices has been associated with a livelier pace of world economic activity."

Stan Shipley, senior economist at Merrill Lynch Government Securities in New York, had a different view, saying "It's hard to get to deflation when PPI was up so much the month before. It really means that prices are stable."

November's price declines were primarily driven by two areas. Energy prices declined 1.8 percent, partially reversing October's 4.2 percent increase. The price of passenger cars fell 3.6 percent, the largest such decline in 13 months, after a 2.2 percent October increase.

Year-over-year, wholesale prices were up 0.9 percent, accelerating from October's 12-month increase of 0.6 percent.

The report indicated there are few pressures within the manufacturing and farming sectors likely to feed through to higher prices for consumers at retail stores.

The U.S. Federal Reserve has few worries about the inflation outlook for now. Indeed, economists said the latest data raised more worries about the possibility of deflation rather than significant price rises ahead.

Within the energy category, gasoline prices fell 9 percent and heating oil fell 11.1 percent. Prices of residential natural gas rose 3.1 percent in November.

Prices of intermediate goods fell 0.1 percent in the latest month after a 0.7 percent increase in October.