December drop in retail sales deepens recession anxieties

Shoppers cut back on their spending at the nation’s retailers by 0.4% in December, wrapping up the weakest sales year since 2002, according to a gloomy report that fanned fears of a recession.

The Commerce Department reported Tuesday that the month-to-month drop in retail sales, which followed a brisk 1% gain in November, was the worst showing since June, when merchant sales declined by 0.8%.

Shoppers turned into penny pinchers under the strains of a deteriorating job market, higher energy bills and a persistent housing slump that has weakened home values and propelled foreclosures to record highs.

“Consumers held tight to their wallets in December, raising questions about whether household spending will be enough to keep us out of a recession,” said Joel Naroff, president of Naroff Economic Advisors.

In another report, the Labor Department said wholesale prices slipped 0.1% in December but were up 6.3% for all of 2007, the biggest annual gain in 26 years, mostly reflecting higher energy costs.

Excluding sales of automobiles, which can swing widely from month to month, sales at all other retailers also fell by 0.4% from November to December, the biggest decline since August.

The report was much weaker than many economists had expected. They had forecast overall sales to be flat last month and for sales excluding autos to slip by 0.1%.

The big worry is that consumers will continue to restrict their spending, tipping the economy into a recession.

For all of last year, retail sales rose 4.2%. That was down from a 5.9% increase in 2006 and was the smallest rise since 2002, when sales went up just 2.4% as the economy was recovering from the 2001 recession.

“Higher prices for energy and food, together with falling confidence, are hammering discretionary spending,” said Ian Shepherdson, chief economist at High Frequency Economics.

The weakness in the retail sales report was fairly widespread, underscoring the stresses on consumers.

Sales at building and garden supply stores, for example, fell 2.9% in December from the previous month, the most since February 2003.

Purchases of electronics and appliances dropped 1.9% last month, the most in nearly two years.