U.S. retail sales slip, hurting recovery hopes

By Lucia Mutikani

WASHINGTON (Reuters) - Sales at U.S. retailers fell for a second straight month in April as cash-strapped consumers held back on purchases, government data showed on Wednesday, denting hopes the economy would soon emerge from recession.

The Commerce Department said retail sales slipped 0.4 percent after falling 1.3 percent in March.

Sales dropped despite an increase in the disposable income of some households due to tax cuts and cash transfers linked to the government's record $787 billion stimulus package.

Analysts said U.S. householders, whose wealth has been decimated by plunges in house and stock prices, likely decided to save the extra income or pay off debt instead of spending it. Economists had expected sales to be flat.

"The 'green shoots' talk was premature. There are some preliminary signs (of improvement) in certain areas of the financial markets but in terms of the real economy, we are still a long ways off," said Brian Bethune, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts.

U.S. stocks, which had rallied in recent weeks on perceptions the 17-month-old recession was close to a bottom, fell, closing 2 to 3 percent lower.

Losses were led by retail shares, with the Dow Jones retail index dropping 2.8 percent, while manufacturers, home builders and commodity companies stumbled also.

The Dow Jones industrial average fell 184.22 points, or 2.18 percent, to 8,284.89. The Standard & Poor's 500 Index lost 24.43 points, or 2.69 percent, to 883.92. The Nasdaq Composite Index gave up 51.73 points, or 3.01 percent, at 1,664.19.

Incomes have also been weighed down by high unemployment, forcing consumers to limit spending mostly to necessary purchases. That has hit companies such as department store operator Macy's and apparel maker Liz Claiborne Inc, which both reported quarterly losses on Wednesday.

CONSUMERS NOT SPENDING

Commerce Secretary Gary Locke said the fall in sales, despite some improvement in consumer sentiment, showed "just how difficult the economic environment remains".

Excluding motor vehicles and parts, retail sales dipped 0.5 percent in April, compared to a 1.2 percent decline the prior month, the Commerce Department said. Vehicles and parts sales rose 0.2 percent after a 2.0 percent plunge in March.

"Consumers still haven't decided to start spending money and the economy is still in a funk. Folks are very focused on non-discretionary items, buying staples, and people are trying to deleverage themselves," said Bob Duffy, leader of global advisory firm FTI's Retail Practice.

Gasoline sales dropped 2.3 percent in April after tumbling 3.2 percent in March. Sales of electronic goods fell 2.8 percent, while building materials rose 0.3 percent.

The data suggested that consumer spending, which accounts for about 70 percent of U.S. economic activity, will probably fall in the second quarter, analysts said. Spending had risen at a 2.2 percent annual rate in the first quarter after a 4.3 percent plunge in the final three months of last year.