US retail sales fell unexpectedly in December to close out the weakest year at the cash register since 2002, data showed today, the strongest signal yet that the economy may be sliding into recession under the weight of a housing and credit crisis.
At the same time, while prices at the farm and factory gate showed their biggest annual increase in more than 25 years last year, they dipped in December. That suggested the US Federal Reserve may have room to cut interest rates more to stave off an economic contraction.
The Commerce Department said retail sales dropped 0.4 per cent last month and it revised down November's sales gain to 1 per cent from a previously reported 1.2 per cent.
"If consumers continue to shy away from the shops and the malls, the economy may not be able to avoid a recession," said Chris Rupkey, chief financial economist for Bank of Tokyo/Mitsubishi UFJ.
Stock prices were sharply lower in early-morning trading as investors weighed chances an economic downturn was at hand.
But bond prices were generally higher on heightened prospects that Fed policy-makers, who have expressed more worry about a potential stall in growth than about inflation, were bound to cut rates sharply when they meet at the end of the month now that evidence of softening consumer demand is clear.
"This shows us the US consumer, who has been the stalwart holding up the US economy of late, is starting to buckle," said Firas Askari, head of foreign exchange trading for BMO Capital markets in Toronto.
Analysts fear the consumer spending crutch that the US economy has relied upon for growth is being kicked away, a concern that the soft retail sales data reinforced.
Consumers are being doubly pinched by rising energy costs and falling home prices and there is no sign that pressure from either source will ease in 2008.