Retail sales in March tarnish economy's glimmers of hope

— -- A weak March retail sales report out Tuesday suggests consumers are still not in a shopping mode, dealing a setback to the growing hope on Wall Street and in Washington that the worst may soon be over for the battered economy.

The latest to bolster those hopes was Federal Reserve Chairman Ben Bernanke who on Tuesday said there were "tentative signs that the sharp decline in economic activity may be slowing," pointing to recent better-than-expected data on home sales, homebuilding and some areas of consumer spending.

Such blips of positive news have raised hopes that things are getting better, or at least not getting worse. That optimism has help drive the Dow Jones industrials up 21% since hitting its March 9 bear market low.

Tuesday's news that retail sales fell in March, after notching gains in the first two months of the year, called into question whether the economy has hit bottom.

It was a "hit to the bullish case that things are improving," Paul Hickey of Bespoke Investment Group told clients Tuesday.

Jittery investors sold off stocks, pushing the Dow Jones industrial average down 137.63 points, or 1.7%, to 7920.18.

Other news this week, including key first-quarter profit reports from big banks such as JPMorgan Chase and Citigroup, the Fed's latest snapshot of key regional economies and fresh data on industrial production and housing, will be scrutinized by investors to get a sense of whether the 1.1% drop in March retail sales is a sign of an economic relapse or just a one-time bump on the road to recovery.

Morgan Stanley economists in a note to clients said that although "a bottoming process is now underway," the seriousness of the recession raises "the potential for head fakes and false dawns."

Economists keep a close eye on retail sales because consumer spending accounts for more than two-thirds of U.S. economic activity. Some economists noted that although consumers are very cautious, the numbers may have been skewed if there were problems adjusting for the shift in Easter this year from March to April. The decline in retail sales in March in part likely also reflected lower prices. The retail sales report accounts for changes in dollar amounts sold, not volume.