Updated March 23 at 9:23pm

Drop in U.S. retail sales points to slower growth


WASHINGTON - Retail sales in the U.S. fell in May for a second month, prompting economists to cut forecasts for economic growth as limited job and income gains hold back consumers.

The 0.2 percent decrease matched April’s drop that was previously reported as a gain, Commerce Department figures showed today in Washington. Sales excluding car dealerships slumped by the most in two years.

The smallest wage gains in a year and unemployment exceeding 8 percent are taking a toll on the consumer spending that accounts for about 70 percent of the economy, leaving it more vulnerable to shocks from the European crisis. Federal Reserve policy makers gather next week to decide whether further stimulus is needed to fuel the three-year-old expansion.

“The consumer is pulling back,” said Michael Brown, an economist at Wells Fargo Securities LLC in Charlotte, N.C., who correctly forecast the drop in sales. “There isn’t a lot of job creation. We will continue to see softer numbers.”

The Standard & Poor’s 500 Index fell 0.3 percent to 1,320.88 at 12:11 p.m. in New York. Treasuries advanced, sending the yield on the 10-year note down to 1.64 percent from 1.67 percent late yesterday.

Last month’s drop in retail sales matched the median forecast of 79 economists surveyed by Bloomberg News. Estimates ranged from a drop of 0.7 percent to a gain of 0.5 percent. April and May marked the first back-to-back declines in two years.

Europe’s economy

In the euro area, industrial production decreased for a second month in April, led by a drop in Germany and adding to signs of a deepening economic slump. Output in the 17-nation euro region declined 0.8 percent from a month earlier, the European Union’s statistics office in Luxembourg said.

Japan’s machinery orders increased more than forecast and South Korea’s unemployment fell as Asian economies showed resilience in the face of Europe’s debt crisis, other data showed.

Economists at Goldman Sachs Group Inc. reduced their tracking estimate for U.S. second-quarter gross domestic product immediately following the retail sales report, to a 1.6 percent gain from 1.8 percent. Morgan Stanley cut its projection 0.2 percentage point, to 1.8 percent, while Credit Suisse marked down GDP for the period to 2.2 percent from 2.5 percent.

Souvenir sales

“People aren’t opening their wallets,” said Ivy Montville, who operates White House Gifts, a souvenir shop in Washington. “This year, the first quarter was good but the second quarter has been marginal. The economy just isn’t as strong as it used to be.”

The Georgetown Day Spa in Charlotte, N.C., has suffered an almost 50 percent drop in its massage business this year and 25 percent decline in skin care, said owner Gary Adams. Customers are also putting off haircuts and coloring, he said.

“People are waiting a little bit longer between services, going for five or six weeks maybe instead of four,” said Adams, 55, who started the business in 1998. “Everybody has been really cautious, trying to save where they can or stretch the dollar out.”

Another report today showed wholesale prices dropped in May by the most since July 2009 as energy and food costs decreased. The producer price index declined 1 percent, more than forecast, after falling 0.2 percent the prior month, Labor Department figures showed.

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