Retail sales fall, smacking stocks, denting recovery hopes

Retail sales fell for a second month in April, a disappointing performance that knocked stock prices down and raised doubts about how soon consumers are going to help push the economy out of recession.

The Commerce Department said Wednesday that retail sales fell 0.4% last month, much worse than the flat reading economists expected. The April weakness followed a 1.3% drop in March that was worse than first estimated.

The retail report is a key indicator of consumer spending, which accounts for two-thirds of economic activity. Most experts believe the recession won't end until consumer spending picks up for an extended period, re-igniting business confidence and an improvement in employment.

Widening losses in earnings reports from retailers Macy's and Liz Claiborne added to the gloom that sent major stock indexes down almost 2% Wednesday.

Retail sales had posted gains in January and February after falling six straight months, raising hopes that the consumer sector might be stabilizing. But the setbacks in March and April could darken some forecasts.

The hope had been that consumers were starting to feel better about spending, helped by tax breaks included in the $787 billion stimulus bill. Households spent the fall hunkered down in the face of hundreds of thousands of job layoffs and the worst financial crisis since the 1930s.

The latest retail data "are yet another illustration that, although the worst is now over, there is still no evidence of an actual recovery," Paul Dales, U.S. economist with Capital Economics in Toronto, wrote in a research note.

While anecdotal evidence suggests some improvement in sales in recent weeks, "to offset the plunge in wealth, the household saving rate still needs to double from the current rate of 4%," Dales wrote. "With falling employment hitting incomes, this can only be achieved by a further retrenchment in spending."

Another report said U.S. businesses slashed their inventories for a seventh consecutive month in March, the longest stretch in seven years, as companies struggled to cope with a prolonged recession.

The Commerce Department said inventories dropped 1% in March. That matched economists' expectations and followed a 1.4% drop in February. Total business sales fell 1.6% in March after being flat in February. Businesses have been struggling to reduce their stockpiles of unsold goods in the face of declining sales.

The worse-than-expected April retail sales reading came despite a 0.2% increase in auto sales, which fell 2% in March. Excluding autos, the drop in retail sales would have been 0.5%, much worse than the 0.2% gain economists expected.

Sales outside of autos showed widespread weakness. Demand at department stores and general merchandise stores fell 0.1% and sales at specialty clothing stores dropped 0.5%.

Department store operator Macy's m on Wednesday reported a wider loss for the first quarter due partly to restructuring charges. Still, the company expects to see an improvement in sales from its localization efforts beginning in the fourth quarter of 2009, and in the spring of 2010.

Liz Claiborne liz reported a first-quarter loss that was worse than Wall Street expected. The apparel maker said its quarterly loss swelled on restructuring charges and a drop in same-store sales stemming from lower consumer spending and an extra week of sales in the year-ago period.

Sales also fell at furniture stores, electronic and appliance stores, food and beverage stores and gasoline stations.

The performance at department stores and specialty clothing stores came as a surprise because the nation's big chain stores had reported better-than-expected results for April. Same-store sales, rose 0.7% last month compared with April 2008. It was the first overall increase in six months, according to the tally by Goldman Sachs and the International Council of Shopping Centers.

For April, some mall-based clothing stores saw their declines level off and Wal-Mart Storeswmt, the world's largest retailer, had reported its same-store sales rose 5%, excluding fuel, which beat expectations. Same-store sales, or sales in stores open at least one year, is considered a key metric of a retailer's financial health.

The chain store sales report last week showed that Gap gps, American Eagle aeo and Wet Seal wtsla posted smaller sales declines at their established locations than analysts had forecast.

The Children's Placeplce, T.J. Maxx owner TJXtjx and teen retailer The Bucklebke saw bigger gains than expected. But luxury stores again were hard hit as their higher-end wares find fewer takers.