The Wall Street Journal-20080116-December Retail Sales Slid 0-4-- Some Investors Bet Aggressive Rate Cut Is Fed-s Next Move
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December Retail Sales Slid 0.4%; Some Investors Bet Aggressive Rate Cut Is Fed's Next Move
Retail sales in December posted their worst performance in six months, as consumers curbed holiday spending on a broad swath of products, including electronics, apparel and sporting goods.
Last month's worse-than-expected 0.4% decline from November portends an anemic start for retailers in the new year, and helps to solidify expectations that the Federal Reserve will cut interest rates by half a percentage point at its Jan. 29-30 meeting.
Some investors think the Fed might be even more aggressive; futures markets put almost-even odds on the probability of a three-quarter- point reduction in interest rates. But such a big cut is considered unlikely by most analysts.
Producer prices declined 0.1% last month but rose 6.3% for all of last year, the biggest increase since 1981 and the result of higher food and energy prices. Excluding those categories, inflation was tame for the month and the year as a whole.
David Resler, chief economist at Nomura Securities, said the retail- sales report was "pretty discouraging," adding, "We don't have much momentum in consumer spending. The fundamentals are getting worse."
December's drop was the first decline in retail sales since June, when sales fell 0.8%, the Commerce Department said. In addition, the sales figures for October and December were revised lower. For all of 2007, sales rose 4.2%, the smallest increase since a 2.4% gain in 2002.
Excluding autos and building materials, retail sales dropped 0.1% last month. The weakness was most pronounced in areas related to housing but cut across most major categories. Sales rose in a few categories, including health-care products and food, though part of the rise in food sales was due to higher prices.
A deepening slump in the housing market, higher gasoline prices and a weakening job market are weighing heavily on consumers and raising the odds that the economy will stall and possibly slip into recession.
"The housing issue continues to get amplified in terms of reports about house prices going down more deeply," said Global Insight economist Brian Bethune. In addition, the job market slowdown has shown "a spreading of the overall weakness beyond construction and manufacturing to include financial-sector employment."
The housing and employment situations "are really deflating the balloon in terms of consumer spending," Mr. Bethune said.
A small decline in producer prices for energy in December -- after sharp increases in November -- damped overall inflation at the wholesale level despite higher food prices. Core producer prices, excluding food and energy, rose 0.2% for the month.
The better-than-expected figures for producer prices led economists to lower their estimates for inflation as measured by the consumer price index, which will be released today. The overall moderation in inflation, as the economy weakens, supports the view that the Fed will ease interest rates in the coming months to stimulate growth.
