Retail Sales Fall 1.1 Percent in June

"Incentives drive our business," he said. "When the manufacturers ease off the pedal, our sales slow up."

Sales also fell last month at clothing stores, department stores, and food and beverage stores, and in the category that includes restaurants and bars, the report showed.

The retail sales report followed others indicating that economic growth slowed a bit in the April-June period, as household and business spending were crimped by rising interest rates and higher prices for gasoline, food and many other items. Employers slowed the pace of hiring in each of the past three months; new orders to U.S. factories dropped in April and May; manufacturing activity rose in June at a slower pace than in May.

Several analysts now estimate that the economy grew at an annual rate between 3.5 percent and 3.8 percent in the second quarter -- a healthy pace, but slower than that of the previous three quarters.

A slightly cooler rate of economic expansion would ease inflation concerns and make it easier for the Federal Reserve to stick to its plan of raising short-term interest rates gradually in coming months. But if growth drops too much, the Fed could stop raising rates or even cut them again to prevent the recovery from stalling.

Housing sales soared in the spring as Fed officials made clear they would start raising rates soon. In fact, some of the strongest gains evident in the June retail sales report appeared in categories related to the home: Furniture and home furnishing sales rose 1.1 percent, while electronics and appliance sales rose 0.5 percent.

"The pie is only so big," Barnard said. "People are making trade-offs, and they are choosing the home."

The retail sales figures suggest "the housing market remains a key factor of economic growth," Drew Matus of Lehman Brothers Global Economics wrote in a note to clients yesterday. "As such, the Fed is likely to remain cautious with regard to rate increases."