U.S. Economy: Retail Sales Drop as Expansion Falters (Update3)

By Bob Willis and Courtney Schlisserman


Jan. 15 (Bloomberg) -- Sales at U.S. retailers unexpectedly dropped in December, capping the weakest year since 2002 and pushing the economy closer to a recession.

Sales fell 0.4 percent, the first retreat since June, the Commerce Department said today in Washington. Separate figures from the Labor Department showed producer prices eased at the end of a year that saw the biggest annual jump in more than a quarter century.

The pullback among consumers, whose spending propped up the economy through the housing slump, is eroding profits at retailers from Sears Holdings Corp. to Williams-Sonoma Inc. Coupled with downward revisions to October and November, the decline in sales means economic growth in the fourth quarter was about 1 percent or less, some economists said.

``Consumer spending slowed down pretty dramatically'' in the fourth quarter, said Brian Bethune, director of financial economics at Global Insight Inc. in Lexington, Massachusetts, who correctly forecast the decrease in sales. ``We are kind of flying very close to a stall speed.''

The figures pushed stocks lower, further weakened the dollar and led to a gain in Treasury notes. The Standard and Poor's 500 Consumer Discretionary Index, which includes Target Corp., Lowe's Cos. and Tiffany & Co., dropped 2.3 percent to close at 235.62 in New York.

Economists forecast sales would be unchanged, according to the median of 74 estimates. Retail sales excluding automobiles also decreased 0.4 percent last month after a 1.7 percent gain.

Treasuries, Stocks

Traders anticipate the Federal Reserve will lower its benchmark rate by at least a half point this month, to 3.75 percent. Odds of 0.75 percentage point of reductions were unchanged from yesterday, at 44 percent, futures prices show.

Producer prices fell 0.1 percent in December after a 3.2 percent surge in November that was the biggest in 34 years, a Labor Department report showed. For all of 2007, inflation at the wholesale level was the highest since 1981, paced by a 19 percent jump in fuel costs.

``With growth slowing here in the U.S. and abroad, that should put less pressure on commodity prices and bring inflation down,'' said Jay Bryson, global economist at Wachovia Corp. in Charlotte, North Carolina.

For all of 2007, retailers posted a 4.2 percent sales increase, the smallest in five years. Purchases rose 5.9 percent in 2006.

Still Growing

``Sales are on the weaker side though they're not signaling a collapse,'' said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. ``The momentum is weakening. It keeps the debate going about recession.''

The drop in December sales was led by a 2.9 percent decline at building-material stores, the biggest since February 2003, reflecting the slump in housing. Sales at clothing, electronics and sporting-goods stores were among those that also decreased.

Holiday sales by U.S. retailers climbed 3 percent, the smallest gain since 2002, the National Retail Federation said today. The increase was smaller than the 4 percent rise the group had forecast for November and December.

Williams-Sonoma, the U.S. gourmet-cookware retailer, today reduced its fourth-quarter profit forecast on an unexpected decline in holiday sales.

AutoNation Inc., the largest publicly traded U.S. car dealer, doesn't expect the nation's auto market to pull out of its slump until 2009, Chief Executive Officer Michael Jackson said from Fort Lauderdale, Florida.

Improvement in 2009

The drop in housing and the slowing economy usually take ``30 to 40 months to work through,'' Jackson said in a Bloomberg Radio interview yesterday. ``So we've had declines in 2006, 2007 and 2008, but I'm feeling pretty good about 2009.''

Consumer spending, which accounts for more than two-thirds of the economy, is likely to cool rather than collapse in coming months as the housing slump worsens and hiring slows, according to the median estimate of economists surveyed by Bloomberg News earlier this month.

Spending will grow at an annual rate of 1.6 percent this quarter, down from an estimated 2.6 percent pace in the last three months of 2007, according to the median forecast of economists surveyed by Bloomberg. Spending expanded at an average 3.5 percent pace per quarter over the past decade.

Economists at Morgan Stanley in New York lowered their forecast for spending last quarter to 2.3 percent from 2.9 percent following the sales report. The reduction brought their economic growth estimate down to 0.9 percent.

`Slowdown Has Arrived'

``It looks like the long-awaited consumer slowdown has arrived,'' said Ethan Harris, chief economist at Lehman Brothers Holdings Inc. in New York. ``We've been waiting for that weakness in housing wealth to finally feed into consumer spending. This data is confirming that.'' Lehman economists also said they would probably lower fourth-quarter spending estimates.

Fed Chairman Ben S. Bernanke on Jan. 10 pledged ``substantive additional action'' to insure against ``downside risks'' to the economic expansion.

The biggest housing recession in 16 years is reverberating across the economy as access to credit tightens, consumer and corporate demand weaken and job growth slows. Unemployment rose to 5 percent in December, a 0.3 point jump from November and a highest in two years, according to Labor Department figures.

The magnitude of the gain from a recent 4.4 percent trough prompted economists including Jan Hatzius of Goldman Sachs Group Inc. to warn that the economy may have already entered a recession.

``Recession has now arrived, or will very shortly,'' Hatzius wrote in a note to clients last week.