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Retail spending slides in August

The 0.3% decline, despite a big drop in wholesale prices, raises fresh concerns about a possible recession.

September 13, 2008|Martin Crutsinger | The Associated Press

WASHINGTON — The largest drop in wholesale prices in nearly two years in August failed to spur consumers to spend more at shopping malls, raising new worries about a possible recession as the temporary boost from tax rebate checks becomes a distant memory.

The Labor Department reported Friday that wholesale prices declined 0.9% last month, nearly double the 0.5% drop that economists had expected, as the price of all types of energy including gasoline and natural gas fell sharply.

Economists had expected that lower prices for gas might entice shoppers to spend more. Instead, the Commerce Department reported that retail sales dropped 0.3% in August.

The August slump followed an even bigger 0.5% decline in July, the weakest performance in five months and much worse than the 0.1% decline originally reported.

The back-to-back drops in retail spending increased concerns that the economy, which had gotten a boost from $93.4 billion in stimulus payments, could falter in coming months now that the mass distribution of checks has come to an end.

The economy grew at a surprisingly strong 3.3% rate in the April-June quarter. Economists believe that the increase in the gross domestic product could slow to a barely discernible 1% rate in the current July-September period. And GDP may turn negative in the final three months of this year and the first quarter of next year, they think, meeting the classic definition of a recession.

"There are a long list of negatives confronting consumers at the moment, from falling employment to falling home and stock prices," said Nigel Gault, chief U.S. economist for Global Insight.

The preliminary reading for consumer sentiment in the University of Michigan/Reuters survey released Friday did show a rebound to 73.1, the best showing since January and up from 63.0 in August.

But Gault said most of that rebound reflected the decline in gasoline prices that has occurred in recent weeks, reducing worries about inflation. Consumers' spending expectations for big-ticket items remained depressed, according to the survey.

Auto sales were higher in August, reflecting a rebound from July, but sales at all other merchants fell by 0.7%. Sales declined at electronics and appliance stores, clothing shops, building and garden stores and department stores.

The 0.9% decline in producer prices, which measure cost pressures before they get to the consumer, was the biggest one-month drop since October 2006 and should be welcome news at the Federal Reserve.

Core inflation, which excludes energy and food, was also well behaved, edging up just 0.2% in August, in line with expectations and well below the 0.7% surge of the previous month.

Fed policymakers have been worried that they might have to start raising interest rates if inflation pressures did not start to moderate. Policymakers are expected to keep rates unchanged when they meet Tuesday.

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