Retail sales down in Dec., puzzling economists

NEW YORK -- Early reports from stores on the holiday shopping season looked good. But it turns out retail sales actually fell in December, leaving economists scratching their heads about the state of the recovery.

Sales dropped 0.3 percent from the month before, mostly because people spent less on cars and appliances, the government said Thursday. For the year, they fell 6.2 percent.

Economists said the monthly decline could just be a blip and suggested looking at the past two months together, which would show spending rising modestly. But with unemployment high and credit tight, the report shows the recovery remains tentative.

"I wasn't expecting this. It's a bit of a puzzle," said Scott Hoyt, senior director of consumer economics at Moody's Economy.com. "Consumer spending is growing very weakly, but the key thing is that it's growing."

Retail sales have now fallen two years in a row. The decline in 2008 was much smaller, 0.5 percent. They are the only two years sales have fallen since the government started keeping records in 1992.

For December, there was a small 0.8 percent decline in auto sales, even as automakers report they sold more cars and trucks. That could be because fewer luxury cars were sold and automakers offered more incentives for buyers, said Jeff Schuster, executive director of automotive forecasting for J.D. Power.

The next few months still look scary for retailers. Stores are finding shoppers have little reason to buy now that the holidays have passed. January sales are off to a weaker-than-expected start, according to the International Council of Shopping Centers.

As the nation grapples with 10 percent unemployment, many Americans are basing their purchases on immediate need and are reluctant or unable to borrow money to remodel homes or buy cars.

Outstanding credit card debt, auto loans and other consumer borrowing fell by the largest amount on record in November, the 10th straight month of decline, the Federal Reserve said last week.

Spending on autos and housing have also helped to spur robust rebounds in the past, but those two areas show no signs of a major turnaround. Tight credit will also limit spending even if people start to feel more secure about their jobs, said Michael P. Niemira, chief economist at the International Council of Shopping Centers.

A new report on the labor market also gave a cloudy outlook. The Labor Department said the number of newly laid-off workers requesting unemployment benefits rose by 11,000 for the week, to a seasonally adjusted 444,000. Economists expected an increase of only 3,000.

The rise was partly a result of large seasonal layoffs in the retail, manufacturing and construction industries, a Labor Department analyst said. Without adjusting for seasonal trends, the second week of January usually brings the largest increase in claims during the year, the analyst said.

The long-term trend for unemployment claims is down, but hiring hasn't picked up. That leaves people out of work for longer and longer periods.

While the worst may be over for the economy, people "don't see the best in front of them," said Eric Bender, retail analyst at Brean Murray, Carret & Co. "There is a tremendous amount of uncertainty."

The December drop in retail sales was a surprise. The nation's big retailers had reported better-than-expected results, reflecting a last-minute holiday shopping surge. Those figures only measure part of the industry, mostly clothing and department stores.

Consumer spending is considered critical to any sustained economic revival because it accounts for 70 percent of economic activity.

Excluding autos, gas stations and restaurants, retail sales rose 1.1 percent in November and December compared with a year ago, according to calculations by the National Retail Federation. That was above the trade group's holiday forecast for a 1 percent drop.

The overall economy grew in the third quarter of last year, and many economists believe it grew even faster in the final three months of 2009. They worry the economy will start to slow again unless people step up spending.

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AP Economics Writer Martin Crutsinger in Washington and AP Auto Writer Dan Strumpf in New York contributed to this report.