Dismal Holidays Over, but Retail Outlook Still Dim

The weakness in consumer spending, which accounts for about two-thirds of total economic activity, has been a prime contributing factor to the economy's current swoon. Analysts said the worse-than-expected retail sales report in December reinforced their belief that the current recession, already the longest in a quarter-century, will last at least until the second half of this year. The downturn began in December 2007.

Shoppers on New York's Madison Ave. pass a clothing store promoting a sale of up to 90 per cent...

Shoppers on New York's Madison Ave. pass a clothing store promoting a sale of up to 90 per cent off, Monday, Jan. 5, 2009. Retail sales plunged far more than expected in December, a record sixth straight monthly decline as consumers were battered by a prolonged recession, a severe credit crisis and soaring job losses. (AP Photo/Mark Lennihan)

(AP)

The December sales drop was led by a huge 15.9 percent fall in sales at gasoline service stations, which reflected in large part the big decline in prices at the pump during the month.

Retail gasoline prices have rebounded somewhat, to about $1.79 nationally. But that decline hasn't managed to reverse falling demand. Other than the week that ended Dec. 5, when consumption rose 0.3 percent, it has fallen every week since April 25, according to the weekly SpendingPulse report by MasterCard released Tuesday.

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Tom Kloza, publisher and chief oil analyst at Oil Price Information, said he doubts demand for gasoline can sink much lower: "It's already been cut to the bone where most of it is directly related to employment, or at least represents 'got-to' driving as opposed to discretional use."

But with layoffs soaring and financial markets in turmoil, consumers are hardly in a buying mood. December sales fell across a wide range of stores from auto dealerships to department stores, specialty clothing stores and hardware and appliance stores.

Brian Bethune, chief financial economist at IHS Global Insight, predicted that consumer spending would fall at an annual rate of 3.8 percent in the fourth quarter, matching the decline in the third quarter. Those back-to-back spending drops would be the worst since the early 1980s.

The economy's weakness began with the bursting of the housing bubble two years ago. The slippage intensified in the fall, when the financial system was engulfed in its biggest crisis since the 1930s.

Billions of dollars of losses on mortgages and other types of loans forced the government to put together a $700 billion rescue package in October to try to get banks resume more normal lending. So far, the initiative hasn't achieved much success.