WASHINGTON — New data released Tuesday signaled a downturn in consumer spending, adding to concerns that the economy is heading into a recession, roiling Wall Street and prompting more calls to jump-start the slumping economy.
Retail sales fell four-tenths of a percent in December, according to the Commerce Department. The data were worse than analysts had expected, and came while more worries surfaced as the department revised November retail-sales figures from 1.2 percent to 1 percent.
"Consumers enticed by strong promotional and merchandising strategies in November pulled back in December as economic uncertainty became more prevalent," economist Anika Khan wrote in a note to investors from the Wachovia Economics Group in Charlotte, N.C.
Consumer spending drives about two-thirds of U.S. economic activity, so retail sales numbers are important. Some of the declining sales can be explained by December's falling gasoline prices, which have since rebounded.
On their own, Tuesday's numbers hardly indicated doom. But taken with other recent indicators, such as December's weak job growth, the retail sales numbers suggest a sluggish economy at best. Many mainstream economists have increased their odds for recession to 50-50.
Faced with economic uncertainty, Khan said, consumers are spending less on discretionary items such as clothing and shoes to pay for necessities such as food and health care.
On Wednesday, Democrats in Congress will hold their first hearing on the need for stimulus plans to boost the economy.
Recessions are defined as two consecutive quarters of negative economic growth, and it's often unclear when the economy is in recession until after the fact. That's why presidential candidates are offering their stimulus plans, and why stocks dive every time new economic data are released that point to a slowing economy.
Stocks fell shortly after the retail sales figures were released Tuesday and stayed down throughout the day. The Dow Jones Industrial Average dropped 277.04 points to close at 12,501.11, while the NASDAQ closed down 60.71 points to 2417.59. Since the new year began, the Dow is down more than 5 percent; the NASDAQ is off 7 percent.
It wasn't just economic data that hurt the markets Tuesday. The nation's largest bank, Citigroup, announced a fourth-quarter loss of nearly $10 billion and a 41 percent cut in its dividend. Citigroup also said it would offer a $14.5 billion stake in the company to investors in Kuwait and Singapore to replenish its capital. That's on the heels of last year's $7.5 billion stake taken by investors in Abu Dhabi.
There was one bright spot Tuesday. The Labor Department's Producer Price Index, which measures inflation at the wholesale level, fell by a tenth of a percent in December. This was unexpected; many forecasters had projected an increase of two-tenths of a percent.
Falling wholesale inflation clears the path for the Federal Reserve to slash interest rates when its rate-setting committee meets Jan. 29-30. Fed Chairman Ben Bernanke signaled last week that he's ready to take aggressive action to spark the economy. Financial markets expect a cut of at least half a percentage point, or 50 basis points, to 3.75 percent. When the Fed lowers its benchmark-lending rate, banks move in tandem to lower the prime rate, charged to their most creditworthy customers.
"It was a rather benign report," said Kenneth Beauchemin, an economist with forecaster Global Insight in Lexington, Mass.
But wholesale inflation measures aren't as accurate as the monthly consumer price index, which will be released Wednesday morning. The wholesale inflation report Tuesday pointed to surprisingly higher food costs, and that could spell trouble if it's mirrored in consumer inflation data for December.
Bernanke has been criticized for not cutting interest rates more quickly to prevent an economic slowdown. But he's reluctant to move too fast while inflation hovers at the upper limits of the Fed's perceived comfort zone of 2 percent. Wholesale core inflation data Tuesday showed an increase of 2 percent over the past year.
Some stock traders are calling for a rate cut of three-quarters of a percentage point, but that would be unusual. Since 2000, the Fed hasn't cut more than a half-point at a time.
ON THE WEB
The Producer Price Index report.
The retail sales report.
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