Unexpectedly Weak Retail Sales Dash Hopes Recovery Is Near

By Ylan Q. Mui and Alejandro Lazo
Washington Post Staff Writers
Thursday, May 14, 2009

New government data released yesterday showed that consumers are still struggling under the weight of the recession, undermining hopes that the economy was poised for a turnaround.

The Commerce Department reported retail sales fell 0.4 percent in April from the previous month, worse than economists had predicted. When compared with the previous year, April sales plunged 10.1 percent. In addition, the Commerce Department revised its earlier estimate for March sales from a drop of 1.1 percent to 1.3 percent.

"Although the worst is now over, there is still no evidence of an actual recovery," said Paul Dales, U.S. economist for Capital Economics.

The gloomy numbers ignited a sell-off in the markets. The blue-chip Dow Jones industrial average fell more than 2 percent, or 184.22 points, to 8284.89, while the Standard & Poor's 500-stock index dropped 3 percent, or 24.43 points, to 883.92. The tech-heavy Nasdaq composite index plunged 3 percent, or 51.73 points, to 1664.19.

Investors sold shares of S&P 500 companies that produce discretionary consumer goods, as well as shares of financial firms, industrial companies and information technology companies. Shares of companies in the health-care, consumer staples and telecommunications sectors gained.

Markets have rallied over the past two months as there have been signs that the worst of the economic free fall was over. The government's stress test of the nation's major banks found that most had enough money to weather the recession. Though unemployment numbers rose in April, the rate of decline has slowed considerably. The S&P 500 has surged 31 percent since hitting a 12-year low on March 9.

That exuberance appears to be on hold this week as investors try to gauge whether stocks have shot up too high, too fast.

"Terrible retail numbers compared to what was expected . . . that was just enough to set it off," said James Paulsen, chief investment strategist of Wells Capital Management and a self-described bull. "Now you have some economic ammo for the bears . . . it is going to fuel the debate over whether this is a new bull market or a bear-market trap."

Consumers slashed spending across the board in April, according to the government figures. Sales at department stores dipped 0.2 percent on a monthly basis, and at clothing stores they were down 0.5 percent. Electronics and appliances stores were the hardest hit, with sales falling 2.8 percent as shoppers held off on big-ticket purchases.

Gas station sales were down 2.3 percent, and grocery store sales declined 1.1 percent. One bright spot was building material and garden stores, where sales rose 0.3 percent, as the arrival of spring encouraged consumers to embark on gardening and renovation projects.

"This is not a pretty report no matter how you look at it," Brian Bethune, IHS Global Insight chief U.S. financial economist, wrote in a note to clients.

Several major retailers are also expected to report earnings this week, which should help shed more light on consumers' mindset. Macy's said yesterday it lost $88 million in the first quarter compared with $59 million a year ago. The company attributed some of the loss to charges for a massive restructuring program and said the loss was within expectations. Sales were $5.2 billion, down 9.5 percent from $5.7 billion in the first quarter last year. Macy's said it hopes to see an improvement as early as the end of the year. Its shares fell nearly 7 percent, or 83 cents, to $11.52.

Wal-Mart is expected to report earnings today.

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