msnbc.com staff and news service reports
updated 7/15/2011 11:43:33 AM ET 2011-07-15T15:43:33

Hopes for a quick economic rebound in the second half of the year seemed more remote on Friday after a glimpse at consumer sentiment showed it at its lowest level in more than two years.

Industrial output also hit the brakes in June, rising a modest 0.2 percent, according to the Federal Reserve. although much of the stall was attributed to auto sector disruptions from the earthquake and tsunami in Japan.

The reports were the latest in a series, including weak retail sales and employment, to suggest that the anticipated step-up in growth in the second half of the year might not be as strong as initially thought.

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"There's not a lot of confidence that growth is going to pick up. It's definitely not a good thing for the bigger picture," said Gennadiy Goldberg, fixed income analyst at 4CAST in New York.

On the bright side, consumer prices fell last month for the first time in a year because of a steep drop in gas costs. Americans paid more for autos, clothes and hotel stays, howwver, driving prices outside of volatile food and energy costs up.

The Consumer Price Index fell 0.2 percent in June, the Labor Department said Friday. Gas prices fell 6.8 percent, the steepest decline in two and a half years.

After excluding volatile food and gas costs, core prices rose 0.3 percent. That was the second straight monthly gain and the largest back-to-back increase since the summer of 2008.

Many of the trends driving the increase in the core index are expected to fade later this year. New car prices rose 0.6 in June, after jumping 1.1 percent in May. Those increases reflect supply shortages stemming from Japan's earthquake, which will ease in the fall.

"We expect a lot of the pickup in core inflation to be reversed, but that won't happen until perhaps early next year," said Paul Ashworth, an economist at Capital Economics.

Federal Reserve chairman Ben Bernanke has said that recent price increases are likely to be temporary. High unemployment makes it unlikely that workers can press for more wages, which in turn makes it hard for companies to raise prices.

Fed policymakers expect core consumer inflation to average between 1.5 percent and 1.8 percent this year.

Major Market Indices

Industrial output rose modestly in June on strength in mining and utilities, but manufacturing production stagnated in part due to supply disruptions in the auto sector following a Japanese earthquake. And a gauge of manufacturing in New York State showed the sector unexpectedly contracted for the second month in a row as new orders worsened.

U.S. consumer sentiment deteriorated in early July to the lowest level since March 2009 on increasing pessimism over falling income and rising unemployment, a survey released Friday showed.

Confidence in government economic policies also curdled, the Thomson Reuters/University of Michigan survey showed. U.S. lawmakers are wrangling over a budget deal that would allow the government to raise the debt ceiling -- needed so the United States can fund its obligations next month.

"It's pretty ugly. This is a really weak number, it's the weakest number since March 2009, which is not good. I would say that this is an indication that the not-handling of the debt ceiling in Washington is certainly impairing consumer confidence," said Ward McCarthy, chief financial economist at Jefferies & Co.

At a news conference on Friday about the debt ceiling talks, President Barack Obama said  Congress has a "unique opportunity to do something big" and stabilize the U.S. economy for decades by cutting deficits even as it raises the national debt limit ahead of a critical Aug. 2 deadline. But, he declared, "We're running out of time."

The preliminary reading for the consumer sentiment index dropped to 63.8 in July from 71.5 the month before, falling far short of expectations of an increase to 72.5, according to a Reuters poll of economists.

The survey's barometer of current economic conditions fell to 76.3, the lowest since November 2009, from 82.0. The gauge of consumer expectations was also at its lowest since March 2009, tumbling to 55.8 from 64.8.

The Associated Press and Reuters contributed to this report.

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