Economy's song full of sour notes

WASHINGTON — Oil hit a record high, the dollar sank again and consumers stopped buying pretty much everything.

Stocks kept gyrating, too, on Thursday, swinging between gloomy recession evidence and rising hopes that all the bad news would bring another aggressive cut in interest rates when the Federal Reserve meets next week.

The Bush administration, conceding that the economy is facing "difficult" times now, rushed out new proposals to fix various problems that have led to a severe crisis in credit markets. Administration officials predicted an economic rebound once the impact of the Fed's credit cuts and the recently passed economic stimulus package begin to be felt.

Private analysts were not as confident, worrying that the economy is being hit by multiple blows and noting that some of the problems, such as plunging home sales and mortgage defaults, are showing no signs of abating.

"We're in the belly of the recession beast right now and all we really can do is take defensive action," said Bernard Baumohl, managing director of the Economic Outlook Group.

The Commerce Department reported that consumers, battered by falling home values, job losses, soaring energy costs and a severe credit squeeze, stopped going to the malls in February, triggering a 0.6 percent drop in retail sales. It was the second big drop in retail sales in the past three months, a pattern consistent with the onset of a recession. Sales were down across a broad swath of the economy, from autos and furniture to appliances.

Consumer spending accounts for two-thirds of total economic activity, and many economists think the country is in recession or soon will be.

At the White House, deputy press secretary Tony Fratto said the Bush administration expected a "difficult and challenging" period. But he also said Americans should have confidence in the long-term future of the economy because of the positive impact of the Fed's rate cuts and the economic stimulus package that will send rebate checks to 130 million households starting in May.

Bush is headed to New York on Friday to deliver a speech on the economy.

"I think it's important for the president to get out and talk about how he sees the economy, and why he sees the economy improving as the year goes on," Fratto said. But he conceded that surging energy prices are acting as a drag and "higher oil prices and higher gasoline prices are not going to go away overnight."

Indeed, both crude oil and gasoline prices hit all-time highs on Thursday, with crude closing at $110.33 per barrel on the New York Mercantile Exchange. Gasoline prices jumped 2.1 cents a gallon overnight to a national average of $3.267 a gallon, according to AAA and the Oil Price Information Service. Analysts predicted that gasoline prices will keep climbing.

The dollar, meanwhile, dropped anew as global investors worried about the length and severity of any U.S. downturn. The dollar dipped briefly below 100 Japanese yen for the first time in 12 years and fell to a new low against the euro.

The worst of the U.S. slowdown has been the housing sector, which has been in a two-year slump that has seen sales and prices plunge in many formerly hot real estate markets. Those declines have shaken consumer confidence and triggered rising mortgage defaults. Homeowners could no longer count on rising prices to build equity in their homes that would allow them to refinance into more affordable loans.

The president's Working Group on Financial Markets, led by Treasury Secretary Henry Paulson, put forward a broad blueprint of changes Thursday. The proposals were aimed at correcting a variety of abuses from mortgage brokers who pushed prospective buyers into loans they could not afford, Wall Street investment firms that aggressively packaged the mortgages in securities, and credit-rating agencies that failed to assess the risks those securities carried.

While the recommendations could help prevent a repeat of the current crisis, critics said the administration still needed to go much further to stave off an expected tidal wave of foreclosures in coming months.

Nearly 60 percent more U.S. homes faced foreclosure in February than a year earlier, according to a report Thursday from California-based RealtyTrac Inc. Nevada, California and Florida registered the highest foreclosure rates.