U.S. consumer prices were unchanged last month and industrial output declined at a slower pace, reports showed on Friday, providing more evidence that the worst phase of the recession may be over.
Signs the 17-month-old recession may be nearing an end helped push consumer confidence in May to its highest level since the September collapse of investment bank Lehman Brothers. Further dissipating the gloom, the contraction in New York state factory activity eased this month.
The more data we are seeing, it's not a doomsday scenario. Yes, we are still in a recession, but we may be in the stage of pre-recovery. All the data have been encouraging, said Andrew Richman, fixed income strategist at Suntrust Private Wealth Management in Palm Beach, Florida.
U.S. stocks were higher in morning trade, while prices for U.S. government debt fell as investors grew more confident that the economy was stabilizing after back-to-back quarters of sharp contractions.
The Labor Department said the Consumer Price Index was flat last month, as expected, after falling 0.1 percent in March. Compared to the same period last year, consumer prices fell 0.7 percent, the biggest 12-month decline since June 1955.
A separate report from the Federal Reserve showed industrial production fell 0.5 percent last month, the sixth consecutive monthly decline but a more modest drop than in recent months. A month earlier, output fell by 1.7 percent.
The capacity utilization rate for total industry, a measure of slack in the economy, fell to 69.1 percent in April, the lowest level on records dating back to 1967.
Companies in the fall decisively cut their production levels to below the level of sales, resulting in a sharp decrease in business inventories in the first quarter, said Tony Crescenzi, chief bond analyst at Miller Tabak & Co in New York.
The recalibration is facilitating stabilization in production, which will show through to a variety of data.
Adding to the somewhat-less-gloomy picture, the Reuters/University of Michigan Surveys of Consumers' preliminary index of confidence for May rose to 67.9 from 65.1 in April. The index of consumer expectations jumped to 69.0, its highest level since October 2007, from 63.1.
Separately, the New York Federal Reserve Bank's index of manufacturing activity in New York State climbed to minus 4.55 in May, its highest level since August 2008, a month before the Lehman collapse ushered in a much deeper global slump.
All together, the figures provided more signs that the pace of recession may be easing. The current downturn, which began in December 2007, is already the longest since the Great Depression.
INFLATION OR DEFLATION
Rising unemployment has eroded household income and undercut consumer demand. The lack of demand and general slack in the economy have robbed companies of pricing power, keeping inflation low and heightening concerns about a dangerous downward price spiral.
The CPI report offered something to think about both for those who are worried about falling prices and those who are concerned about the risk of inflation as a flood of stimulus money flows through the economy.
The Fed, which has pumped more than $1 trillion into the economy in a bid to break its downward spiral, is worried about deflation although it sees the risks as diminishing.
While the headline inflation figure was flat, and economists widely expect negative readings later this year, core prices, which exclude food and energy items, rose a faster-than-expected 0.3 percent.
That was driven largely by a second consecutive large gain in the cost of tobacco as a government excise tax went into effect.
(Additional reporting by Richard Leong and Chris Reese in New York; Editing by Leslie Adler)