As reported by Bloomberg this morning Retail Sales in U.S. Fall Most in Two Years Amid Fuel Costs, Housing Slump. Sales were very weak - actually falling - across the board: headline, core, ex-automobiles, ex-gasoline. This was not much of a surprise to the readers of this blog as two days ago I wrote:

An analysis...suggests that the weakness of real private consumption in Q2 will continue in the second half of 2007 and that consumption growth may actually further deteriorate in H2. Clearly oil and gasoline prices are now rising putting a dent on real disposable income; further, home prices are falling and home equity withdrawal is shrinking at a rapid rate; while we already see evidence of a credit crunch in the subprime sectors and in other components of the mortgage market; consumer confidence is weak and falling recently. So, the case for resilience of private consumption hinges on continued growth of real incomes – now at risk because of high oil prices – and continued strength of the labor market. But, as discussed below, the true conditions of the labor market are currently weaker than those suggested by the official employment growth figures. Thus, real income and employment growth are not as strong as the consensus makes them. Thus, most of the determinants of consumption suggest weakness ahead....

When you put all these factors together one can make a sensible case that private consumption spending will remain weak in the second half of 2007 after a significant slowdown in Q2. It took a 4.2% growth rate in consumption to get a dismal 0.7% GDP growth in Q1. Thus, as we can expect private consumption growth to have slowed down to 1.5% in Q2 and remaining as weak (if not weaker) in H2, what does this bode for GDP growth in the second half of 2007? If the consumption slowdown continues – for the reasons explained above – a build up of unsold goods will lead both to another retrenchment of inventories and, more ominously, another slowdown in corporate capex spending. And since net exports are not expected to provide a net contribution to GDP growth in the second half of 2007, weak consumption growth, still falling residential investment, slowing down capex investment and retrenchment in inventories suggest weak economic growth – well below consensus – for the second half of 2007, possibly a return to the “growth recession” of Q1.

And here is the Bloomberg story:

July 13 (Bloomberg) -- Retail sales in the U.S. fell in June by the most in almost two years, raising concern near- record gasoline prices and falling home values are taking a bigger toll on consumers than economists forecast.

The 0.9 percent decrease followed a revised 1.5 percent gain the prior month, the Commerce Department said today in Washington. Purchases excluding automobiles unexpectedly fell 0.4 percent, the most since September.

The figures suggest consumer spending, which accounts for more than two-thirds of the economy, cooled heading into the second half of the year. More jobs and rising wages will limit the damage to growth, along with gains in exports, manufacturing and business investment, economists said.

``Consumer spending can't be sustained at the pace it has been,'' said Carl Riccadonna, an economist at Deutsche Bank Securities Inc. in New York. ``We'll remain below trend for growth in the second half. This could be the beginning of the long-anticipated slowdown in housing-related spending.''

Retail sales, which account for almost half of all consumer spending, were projected to fall 0.1 percent after an originally reported 1.4 percent gain in May, according to the median estimate in a Bloomberg News survey of 75 economists.

Estimates ranged from a decline of 0.8 percent to a gain of 0.6 percent. Last month's drop was the biggest since August 2005.

Import Prices

A report from the Labor Department showed prices of goods imported into the U.S. rose 1 percent in June, a fifth straight increase, on higher fuel costs. The figures underscore concerns among Federal Reserve policy makers that inflation is a risk.

U.S. Treasury securities extended gains following the reports. The yield on the benchmark 10-year note, which moves inversely to prices, dropped to 5.09 percent at 9 a.m. in New York, compared with 5.13 percent late yesterday.

Sales excluding automobiles were forecast to increase 0.2 percent, according to the survey median. They rose 1.6 percent in May, revised from a previously reported 1.3 percent gain.

Today's report showed sales at automobile dealerships and parts stores dropped 2.9 percent last month after rising 1.1 percent the prior month.

``The industry is a little softer than what we expected,'' Paul Ballew, executive director of global market and industry analysis at General Motors Corp., said in an interview this month. Some of the decline is linked to the drop in home values, particularly in states like California and Florida, he said.

Gasoline Purchases

Sales excluding gasoline fell 0.9 percent, today's report showed, the most since August 2005. Filling station sales dropped 1.1 percent last month after a 4.1 percent increase the prior month. A drop in the fuel's cost toward the end of June probably contributed to the decline in sales.

Still, gasoline topped $3 a gallon on a monthly average for the first time ever in May and June, adding to Americans' woes, economists said.

The figures also reflected the slump in housing. Stores selling building materials and garden supplies showed a 2.3 percent decrease in sales, sales of electronics and appliances dropped 1.4 percent, and furniture purchases fell 3 percent. The drop in Furniture sales was the biggest since February 2003.

Excluding autos, gasoline and building materials, the retail group the government uses to calculate gross domestic product figures for consumer spending, sales were unchanged, after a 0.9 percent increase the month before.

The government uses data from other sources to calculate the contribution from the three categories excluded.

Industry Report

The report counters industry figures yesterday that showed a bigger-than-forecast gain. The industry figures account for about 17 percent of total retail purchases and often don't correlate with government data. Chain-store sales only measure results at locations open at least a year and exclude new-store openings and Internet purchases.

``Consumers continue to be challenged financially, with more pressure on discretionary spending,'' Eduardo Castro- Wright, president and chief executive officer of Wal-Mart's U.S. stores, said in a statement. ``Gas prices have moved to be their chief concern in our latest survey.''

The prolonged housing recession, made worse by the subprime-mortgage market meltdown, is one reason some economists predict consumer spending will slow. Declines in property values will prevent Americans from tapping home equity for extra cash, economists said.

More Jobs

An expanding job market will ensure spending doesn't plunge, economists said. A July 6 Labor report showed payrolls rose by 132,000 in June, wages grew and the jobless rate held near a six-year low.

Consumer spending will rise at an average 2.6 percent annual pace in the second half of the year, compared with an average 3.7 percent quarterly increase over the last decade, according to the median estimate in this month's Bloomberg News survey.

Economic growth may settle into a 2.5 percent to 3 percent range at an annual pace through the first half of 2008, the survey showed. The economy expanded at a 0.7 percent pace in the first three months of this year.