As if investors didn't have enough to worry about, Friday's batch of economic numbers shows more signs of recession as well as its evil twin--inflation.
First, the government reported that U.S. consumer spending rose more than expected in January, but the gain was eaten up by swiftly rising prices.
Then, a Chicago-based business group said U.S. Midwest business activity contracted sharply in February, showing that even areas of the country least affected by the boom-bust housing cycle are feeling ripples from the crisis.
On top of that, U.S. consumer sentiment dropped to a 16-year low in February, hitting levels that usually sound the alarm bells of recession, on worries about declining incomes and rising unemployment, a survey showed.
No surprise, then, that stocks opened sharply lower on Friday--and then proceeded to fall even more.
Friday's reports were just the latest in a string of worrisome news about the growing threat of recession and inflation.
"Over the last three to four weeks, there have been a string of economic releases that were dramatically weaker than expected," said John Canavan, a market analyst at Stone and McCarthy Associates. "The implications are quite negative for the economy."
The only bright spot: futures traders are now speculating that the Federal Reserve will cut interest rates by three-quarters of a point at its March 18 meeting instead of the half point that was expected previously.
The combination of higher inflation and an economy struggling with a deep housing downturn and tight credit conditions have led some economists to warn of the risk of "stagflation" -- a combination of stagnant growth and spiraling prices.
Fed Chairman Ben Bernanke told Congress on Thursday the US was not heading into a stagflationary period, saying he expected swift-rising commodity prices to at least level out and lead to an easing of price pressures.
Bernanke also made clear he stands ready to lower a key interest rate again. The Fed, which started cutting interest rates to bolster the economy in September, has turned much more aggressively recently. In eight days in January, the Fed slashed rates by 1.25 percentage points -- the biggest one-month reduction in a quarter-century.
Even so, Friday's economic news only seemed to heighten worries about stagflation.
The Commerce Department said personal spending rose 0.4 percent last month, while personal income increased by 0.3 percent. Analysts polled by Reuters had forecast both personal income and spending to rise by 0.2 percent.
When adjusted for inflation, however, spending was unchanged, due largely to rising food and energy costs.
"Spending was a little hot, but at the same time the cost of food and energy are skyrocketing so that's not that surprising. At the same time, it was higher than what people thought," said Beth Malloy, bond market analyst at Briefing.com in Chicago.
The personal consumption expenditure price index, a key inflation gauge, rose 0.4 percent in January after an upwardly revised increase of 0.3 percent in December. The index has
surged 3.7 percent over the past year, the biggest year-on-year gain since September 2005.
Excluding volatile food and energy costs, the index was up 0.3 percent -- in line with analysts' expectations and the steepest monthly rise since September.
On a year-over-year basis, this "core" price index rose 2.2 percent, matching the prior month's gain.
Many officials at the Federal Reserve, which has cut interest rates sharply 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.
The report on consumer spending, showed Americans dug into their savings for a third straight month in January, as the personal savings rate stood at a negative 0.1 percent of
disposable personal income.
--Reuters contributed to this story