Soft retail sales may signal recession

By Glenn Somerville

WASHINGTON (Reuters) - U.S. retail sales fell unexpectedly in December to close out the weakest year at the cash register since 2002, data showed on Tuesday, the strongest signal yet that the economy may be sliding into recession under the weight of a housing and credit crisis.

At the same time, while prices at the farm and factory gate showed their biggest annual increase in more than 25 years last year, they dipped in December. That suggested the Federal Reserve may have room to cut interest rates more to stave off an economic contraction.

The U.S. Commerce Department said retail sales dropped 0.4 percent last month and it revised down November's sales gain to 1.0 percent from a previously reported 1.2 percent.

"If consumers continue to shy away from the shops and the malls, the economy may not be able to avoid a recession," said Chris Rupkey, chief financial economist for Bank of Tokyo/Mitsubishi UFJ.

On Wall Street stocks sank from the opening, weighed down not only by investor fears of pending recession but also by concern over a bigger-than-expected loss at Citigroup Inc (C.N), which said it was cutting jobs and again raising capital from abroad.

The Dow Jones industrial average .DJI dropped 277.04 points, or 2.17 percent, to close at 12,501.11. The high tech-laden Nasdaq Composite Index .IXIC ended down 60.71 points, or 2.45 percent, at 2,417.59.

Bond yields fell as traders bet that Fed policy-makers will cut interest rates aggressively when they meet at the end of this month to counter softening consumer demand.

The benchmark 10-year U.S. Treasury note US10YT=RR fell to a new four-year low around 3.68 percent.

SEEKING HELP ABROAD

Merrill Lynch MER.N said it was issuing $6.6 billion in preferred shares to investors, including the Kuwait Investment Authority, as it continues to look overseas to boost its capital after being hit by losses on subprime mortgages.

Last month, Merrill sold a stake in itself to the Singapore government and an asset manager, raising as much as $7.5 billion.

Fed Chairman Ben Bernanke said last week the U.S. central bank was ready to take "substantive additional action" to support growth and provide "insurance" against a downturn.

Bernanke is set to testify before Congress this Thursday on the economy's short-term outlook and lawmakers who are working on their own economic stimulus plan are expected to press him on what is most needed to keep expansion going.

A report on Tuesday from the Congressional Budget Office, requested by Democratic chairmen of the Senate and House of Representatives budget committees, said the goal should be to get money into the hands of low-income consumers quickly because they will most likely spend it.

The Bush administration is considering economic stimulus measures, but Democratic leaders want the White House to agree to work with them on a final plan, which many believe is likely to include rebates to individuals.