WASHINGTON: A grim reading on US consumer confidence Friday darkened the outlook for economic recovery, while news of an industrial rebound and flat inflation underscored the depths of the long recession.

The University of Michigan's report that consumer sentiment in August had unexpectedly headed south rattled US and European stock markets.

The sentiment index dipped to a preliminary 63.2 from 66.0 in August, confounding most analysts who had expected it to rise to 69.0.

It was the second consecutive month of decline after four monthly increases. In June, the index hit its highest level since February 2008 at 70.8.

Coming in the wake of an unexpected 0.1 percent drop in retail sales in July, the weak consumer sentiment reading lent support to a weak outlook for consumer spending, the main driver of US economic activity.

Brian Bethune, chief US financial economist at IHS Global Insight, said the report was "a sober reminder of how much pressure households are under."

Bethune cited huge cumulative declines in household wealth since the recession began in December 2007, rising unemployment and underemployment, and downward pressure on wages, salaries and benefits as companies slash costs.

Separately, the Federal Reserve reported US industries boosted production in July for the first time in nine months, by 0.5 percent, a tick higher than the consensus forecast of 0.4 percent.

The Fed noted that "aside from a hurricane-related rebound in October 2008, the gain in July marked the first monthly increase since December 2007," the month the world's largest economy officially entered recession.

Manufacturing output advanced 1.0 percent in July, led by a 20.1 percent jump in auto production.

Analysts noted the spectacular increase was unusual, given that General Motors and Chrysler plants had reopened after early shutdowns for bankruptcy reorganizations at both automakers.

Excluding motor vehicles and parts, manufacturing production edged up 0.2 percent.

"What we are seeing here is the initial fragile blossoms of the recovery," Bethune said.

"However, the auto industry will burn through the remaining funding of the 'cash for clunkers' program very quickly, and other fiscal stimulus measures -- the first-time homebuyers credit in particular, will expire before the end of the year," he said.

Separately, the Labor Department reported consumer prices held unchanged in July from June, in line with expectations, leaving a year-over-year 2.1 percent drop that was the steepest since 1950 due to an unfavorable comparison with pre-global meltdown conditions.

Core CPI, which excludes volatile food and energy prices, rose 0.1 percent, slowing from a 0.2 percent rise in June. The core rate was up 1.5 percent from July 2008, a two-tenths point gain from June.

Those inflation levels are considered to be within the comfort zone for the Federal Reserve in setting monetary policy.

As expected, the Fed this week maintained its exceptionally low key interest rate near zero to support the recession-mired economy and reiterated its outlook for subdued inflation.

"There is still no sign of any resurgence in core inflation, which means the Fed should be safe in maintaining low rates and quantitative easing for at least another month as recovery continues," said Andres Carbacho-Burgos of Moody's Economy.com.

Ian Shepherdson, economist at High Frequency Economics, noted persistently tight credit conditions, despite the authorities' massive efforts to kick-start lending.

"The credit constraint on consumers is so great that we have to wonder whether spending will fall short of the pace implied by its historical link with the confidence numbers," he said.

"The numbers for recent months do suggest this is a potentially serious problem."