The good news on Saturday was that it was quite easy to find a parking space at the popular Danbury Mall in Connecticut, an hour's drive out of New York, despite it being one of the year's busiest shopping days. The bad news was that it was possible to find a parking space... This year US retailers are feeling the coldest winds of the recession just at a time when sales should be booming for the holiday season.

Retail sales last month fell by 3.7 per cent, the largest monthly drop since records began in 1992. The fall wiped out most of October's gain, and rekindled fears that an economic bounce in the US, so eagerly anticipated here and in Europe, may be some way off. US consumers drive two-thirds of the world's biggest economy and the final consumer sentiment data of the year on Friday will be watched closely for signs of slippage.

White House budget director Mr Mitch Daniels told CNN yesterday the government hoped for a shallow recession and warned there were signs of deflation and it could be "worldwide in its effect".

It should not be a principal worry, he said, as "flat prices or the absense of inflation is a darn good thing for consumers". The consumer price index remained unchanged in November but underlying prices excluding food and energy rose 0.4 per cent, the biggest jump in five years. Output from US factories and mines continued to fall last month but at a slower pace, giving rise to hopes that the industrial decline which began in autumn 2000 may be coming to an end.

Economists forecast that US stock markets will end the year flat or even lower after a surge in early December which brought the Dow back above 10,000 and the Nasdaq above 2,000 for the first time since before September 11th.

Last week, amid disappointing quarterly earnings reports, the Dow fell back 2.4 per cent and the Nasdaq 3.4 per cent, both slipping below the psychological benchmarks. Since September 21st - the low point after the attacks on the World Trade Centre and the Pentagon - the Dow has climbed 19 per cent and the Nasdaq 37 per cent, but on the year the Dow is still down 9 per cent and the Nasdaq 21 per cent. The latter is 60 per cent down from its March 2000 high.

The Standard & Poor's 500 index is now likely to end the year 13 per cent down, its worst performance since 1974. The index of the most popular stocks lost 10 per cent the previous year as dot-coms imploded. Analysts say the S&P 500's price-to-earnings ratio which normally averages 15 and is a guide to share valuation is still high. It was put at 21.5 by research firm Thomson Financial/First Call. The ratio was 24.7 when the S&P 500 peaked in March 2000.

The market slid last week on downbeat reports from Merck and Bristol-Myers Squibb in the pharmaceuticals sector and from technology heavyweights Ciena and Lucent Technologies.

This week will bring another series of key earnings reports, mainly from retailers like Circuit City, Nike and Best Buy, and financial firms such as Morgan Stanley, Bear Stearns and Goldman Sachs.

They will help define the current state of consumer activity and the financial markets.