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Retail sales fall sharply as higher prices take toll

July 14, 2007

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— Consumers put away their wallets in June, sending retail sales plunging by the sharpest amount in nearly two years. Sales of autos, furniture and building supplies all fell, highlighting the economy's weak spots.

The 0.9 percent drop in retail sales was the biggest decline since August 2005, the Commerce Department reported Friday. It was a far bigger setback than the flat reading that had been forecast.

Part of the weakness was seen as payback for a surprise on the upside in May, when sales surged by 1.5 percent. But the June decline also was viewed as an indication that consumers are cutting back under a barrage of higher prices and a recession in the housing industry.

"Consumers are increasingly cautious in the face of higher gasoline and food prices and slowing home price gains," said Mark Zandi, chief economist at Moody's Economy.com.

Two gauges of consumer confidence gave conflicting signals Friday. The RBC Cash Index fell to its lowest point in nearly a year while the University of Michigan/Reuters survey rebounded to a six-month high, an increase attributed to a temporary retreat in gasoline prices in late June and early July.

The economy slowed to a dismal 0.7 percent growth rate in the first three months of this year, but is believed to have rebounded significantly in the just-completed April-June quarter to growth above 3 percent.

Analysts said, however, that the dip in June retail sales would provide a weaker starting point for the current quarter, and they forecast that growth in the second half of this year would slip to around 2.5 percent as the slump in housing persists longer than expected, acting as a drag on consumer spending.

Housing, which has been hurt this year by spreading troubles in the subprime mortgage market, has seen sales decline and prices fall in many formerly red-hot markets, where sharp price appreciation during the past five years had boosted consumer spending by making consumers feel more wealthy and also allowing them to take out home equity loans to finance purchases.

A separate report Friday showed that another factor that was a significant drag on first quarter growth - an effort by businesses to reduce unsold inventories - seemed to be turning around. Business inventories grew by a better-than-expected 0.5 percent in May.

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