Retail sales weak, but prices expected to stay low

WASHINGTON – Retail sales dropped in July, government data showed, reinforcing concerns among economists that consumers won't spend enough to help a recovery take hold. But Friday is expected to bring better news: July inflation is expected to have remained flat, and industrial production is likely to have grown for the first time in nine months.

Thursday's retail sales report served as a reality check for an economy that lately has appeared poised to emerge from recession and grow again. Consumer spending powers about 70 percent of economic activity.

The Cash for Clunkers rebate program helped give auto sales their biggest jump in six months in July, but sales sank elsewhere. Gas stations, department stores, electronics outlets and furniture stores all suffered.

Overall, sales fell 0.1 percent, the Commerce Department said, after two months of modest gains. Economists had expected a 0.7 percent increase. Excluding autos, sales fell 0.6 percent, also much worse than predicted.

Unemployment, flat wages, tighter credit, fear of layoffs and the urge to save more have caused many consumers to spend less. Shrinking home equity and stock portfolios have compounded the problem.

As a result, "households are in no position to drive a decent economic recovery," Paul Dales, U.S. economist at Capital Economics, wrote in a note to clients.

Even Wal-Mart Stores Inc., which had managed to post robust sales during the recession, reported an unexpected drop in quarterly earnings. The company faulted lower prices for groceries and other products. But it warned that the economy continues to force customers to scale back their purchases.

Still, low prices should provide some comfort for consumers. The worst recession since World War II has kept prices in check, as workers can't demand higher pay due to the scarcity of jobs. Companies have been unable to boost prices because of weak demand.

Over the 12 months ending in June, consumer prices fell 1.4 percent, the biggest decline in almost six decades. That trend is expected to continue when the Labor Department reports the consumer price index figures for July on Friday at 8:30 a.m. EDT.

The latest figures came just a day after the Federal Reserve said the economy appeared to be "leveling out." The Fed, signaling the recession appears to be ending, said it would hold interest rates at their current record lows.

The success of Cash for Clunkers is also expected to push industrial production up 0.3 percent in July. If the forecast is correct, the increase would come after industrial production fell in 17 of the previous 18 months.

The report is slated to be released Friday at 9:15 a.m. EDT.

But some analysts say people buying cars under Cash for Clunkers might be holding that money back from other sectors of the economy where they might otherwise spend it.

Some of Europe's largest economies also benefited from government programs to support the auto industry. Germany and France returned to economic growth in the second quarter, raising hopes the recession will end throughout Europe sooner than thought.

In the United States, weak retail sales were widespread in July. One gauge that excludes autos, gas and building materials fell slightly, the fifth straight month of declines.

Department store sales fell 1.6 percent last month. And the broader category of general merchandise stores, which includes big chains such as Wal-Mart Stores Inc. and Target Corp., dropped 0.8 percent.

Gas station sales plunged 2.1 percent in July — more because of falling prices at the pump than shrinking demand.

On Wall Street, stocks rose modestly. The Dow Jones industrials finished up about 37 points at just above 9,398 — their highest close since the market lows of early March.

Employers cut the fewest number of jobs in July in nearly a year, and the unemployment rate fell for the first time in 15 months. But jobs remain scarce.

More than 6.2 million Americans are receiving jobless benefits, the government said Thursday — 140,000 fewer than the previous week. Counting people taking advantage of an unemployment benefits program enacted by Congress, 9.25 million people received unemployment compensation in the week that ended July 25, down about 100,000 from the week before, as new claims rose but some recipients ran out of benefits and fell off the rolls, economists said.

The nonprofit National Employment Law Project has calculated that 540,000 people will exhaust their emergency benefits without finding work by the end of September. And by the end of the year, it predicts 1.5 million will run out.

That prospect has some in Congress calling for a further extension of benefits. Obama administration officials have said they would support an extension.

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AP Business Writers Martin Crutsinger and Alan Zibel in Washington, and Anne D'Innocenzio in New York contributed to this report.