Soft retail sales may signal recession

WASHINGTON (Reuters) - U.S. retail sales fell unexpectedly in December to close out the weakest year at the cash register since 2002, data showed on Tuesday, the strongest signal yet that the economy may be sliding into recession under the weight of a housing and credit crisis.

At the same time, while prices at the farm and factory gate showed their biggest annual increase in more than 25 years last year, they dipped in December. That suggested the Federal Reserve may have room to cut interest rates more to stave off an economic contraction.

The U.S. Commerce Department said retail sales dropped 0.4 percent last month and it revised down November's sales gain to 1.0 percent from a previously reported 1.2 percent.

"If consumers continue to shy away from the shops and the malls, the economy may not be able to avoid a recession," said Chris Rupkey, chief financial economist for Bank of Tokyo/Mitsubishi UFJ.

On Wall Street stocks sank from the opening, weighed down not only by investor fears of pending recession but also by concern over a bigger-than-expected loss at Citigroup Inc (C.N), which said it was cutting jobs and again raising capital from abroad.

The Dow Jones industrial average (.DJI) dropped 277.04 points, or 2.17 percent, to close at 12,501.11. The high tech-laden Nasdaq Composite Index (.IXIC) ended down 60.71 points, or 2.45 percent, at 2,417.59.

Bond yields fell as traders bet that Fed policy-makers will cut interest rates aggressively when they meet at the end of this month to counter softening consumer demand.

The benchmark 10-year U.S. Treasury note fell to a new four-year low around 3.68 percent.

SEEKING HELP ABROAD

Merrill Lynch (MER.N) said it was issuing $6.6 billion in preferred shares to investors, including the Kuwait Investment Authority, as it continues to look overseas to boost its capital after being hit by losses on subprime mortgages.

Last month, Merrill sold a stake in itself to the Singapore government and an asset manager, raising as much as $7.5 billion.

Fed Chairman Ben Bernanke said last week the U.S. central bank was ready to take "substantive additional action" to support growth and provide "insurance" against a downturn.

Bernanke is set to testify before Congress this Thursday on the economy's short-term outlook and lawmakers who are working on their own economic stimulus plan are expected to press him on what is most needed to keep expansion going.

A report on Tuesday from the Congressional Budget Office, requested by Democratic chairmen of the Senate and House of Representatives budget committees, said the goal should be to get money into the hands of low-income consumers quickly because they will most likely spend it.

The Bush administration is considering economic stimulus measures, but Democratic leaders want the White House to agree to work with them on a final plan, which many believe is likely to include rebates to individuals.

TAX TONIC

The White House has pressed Congress to make permanent tax cuts that are scheduled to expire in 2010, arguing that is necessary to build confidence among consumers that their taxes would stay low.

But Treasury Secretary Henry Paulson acknowledged last week that the administration has had little success getting lawmakers on board.

Some economists think the economy may already be in recession because the consumer spending crutch the U.S. economy has relied upon for growth is being kicked away -- a concern the soft retail sales data reinforced.

"This shows us the U.S. consumer, who has been the stalwart holding up the U.S. economy of late, is starting to buckle," said Firas Askari, head of foreign exchange trading for BMO Capital markets in Toronto.

The National Retail Federation reported on Tuesday that its members said their 2007 holiday sales -- which combine November and December sales -- rose a weaker-than-forecast 3 percent to $469.9 billion. The federation had expected a 4 percent increase but said the sales climate deteriorated at year-end.

There were signs that bleaker sales prospects extended into 2008. The International Council of Shopping Centers and UBS Securities LLC said sales last week slipped 0.9 percent and were only up 1.1 percent on a year-over-year basis.

Separately, the Labor Department said the producer price index, which measures prices received by farms, factories and refineries, dipped 0.1 percent in December as fuel prices dropped. However, core prices, which strip out volatile food and energy costs, edged up 0.2 percent.

Retail sales for all of 2007 rose 4.2 percent, a significantly softer gain than the 5.9 percent increase in 2006 and the weakest advance since a 2.4 percent rise in 2002.