Retail sales dropped during December

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Retail sales unexpectedly fell in December, leaving 2009 with the biggest yearly drop on record and highlighting the formidable hurdles facing the economy as it struggles to recover from the deepest recession in seven decades.

In another disappointing economic report, the number of newly laid-off workers requesting unemployment benefits rose more than expected last week as jobs remain scarce.

Still, many economists, puzzled by the retail sales decline that follows reports from retailers of brighter holidays, cautioned that the December figures don’t necessarily signal a big consumer pullback and could be a blip.

Taking November and December figures together provides a picture of modestly positive spending, they said, but the monthly drop undercores how tentative the economic recovery remains, given all the headwinds facing consumers.

“Consumer spending is growing very weakly, but the key thing is that it’s growing,” said Scott Hoyt, senior director of consumer economics at Moody’s Economy.com. “The consumer is very weak. Confidence is exceptionally low.” He added he expects tepid sales growth into the summer.

The Commerce Department said Thursday that retail sales declined 0.3 percent in December compared with November, much weaker than the 0.5 percent rise that economists had been expecting. Excluding autos, sales dropped by 0.2 percent, also weaker than the 0.3 percent rise analyst had forecast.

For the year, sales fell 6.2 percent, the biggest decline on government records that go back to 1992. The only other year that annual sales fell was in 2008, when they slipped by 0.5 percent.

The 0.3 percent decline in December was the first setback since September, when sales had fallen 2 percent. Sales posted strong gains of 1.2 percent in October and 1.8 percent in November, raising hopes that the consumer is starting to mount a comeback.

A separate report showed that business inventories rose by 0.4 percent in November. It marked the second straight month that stockpiles have increased after a stretch of 13 monthly declines in inventories. The hope is that future sales gains will convince businesses to keep restocking, a development that will boost production and provide support for the recovery.

In the jobs report, the Labor Department said new claims for unemployment insurance rose by 11,000 to a seasonally adjusted 444,000. Wall Street economists polled by Thomson Reuters 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. The second week of January usually sees the largest increase in claims, unadjusted for seasonal trends, during the year, the analyst said.

Still, the increase didn’t disrupt the longer-term downward trend in claims. The four-week average dropped to 440,750, its 19th straight drop and lowest level since August 2008.

Initial claims are considered a gauge of the pace of layoffs and an indication of companies’ willingness to hire new workers.

Meanwhile, the number of people continuing to claim benefits dropped sharply to 4.6 million from 4.8 million the previous week. The continuing claims data lags initial claims by a week.

But the so-called continuing claims do not include millions of people who have used up the regular 26 weeks of benefits customarily provided by states, and are receiving extended benefits for up to 73 additional weeks, paid for by the federal government.

More than 5.3 million people were receiving extended benefits in the week ended Dec. 26, the latest data available. That’s a drop of about 135,000 from the previous week.

The large number of people claiming extended unemployment insurance indicates that even as layoffs are declining, hiring hasn’t picked up. That leaves people out of work for longer and longer periods.

The December drop in retail sales was a surprise given that the nation’s big retailers had reported better-than-expected results last week, reflecting a surge of last-minute holiday shopping.

Those figures, based on sales at stores open at least a year, only offer a sliver of the retailing world because the roster consists mostly of clothing stores and largely excludes online sales. Typically, consumers delay buying clothing until the nearer the holiday because the deals get better, whereas for electronics, the deals are best around the day after Thanksgiving.

Last week’s figures also exclude Wal-Mart Stores, which stopped reporting monthly results last year.

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

Excluding autos and gasoline, retail sales rose 1.6 percent in November and December compared with a year ago, when sales were down 2.4 percent, according to Moody’s Hoyt.

For December, sales of autos dropped by 0.8 percent following a 1.2 percent rise in November, according to the government report.

Sales at specialty clothing stores fell 0.6 percent while sales at general merchandise stores, a category that includes big retailers such as Wal-Mart, were down 0.8 percent while sales at department stores were flat.

Sales at electronics and appliance stores dropped by 2.6 percent, and sales at hardware stores dropped by 0.4 percent.

The weakness over the year reflected the battering that consumers have taken from the worst recession since the Great Depression, a downturn that has cost 7.2 million jobs and left households trying to rebuild savings depleted by losses on Wall Street and a crash in housing prices.

Economists are worried about consumer spending in the months ahead given their forecasts that unemployment, currently at 10 percent, will keep rising until perhaps midyear.

The overall economy, as measured by the gross domestic product, grew at an annual rate of 2.2 percent in the July-September quarter and many economists believe that growth strengthened even further in the final three months of last year. However, the worry is that GDP will slow significantly in the early part of 2010 unless consumers continue to spend.

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AP Retail Writer Anne D’Innocenzio contributed to this report in New York.