WASHINGTON Retail sales fell for a second straight month in May and wholesale prices dropped by the most in three years, raising chances of further action by the Federal Reserve to shore up the flagging recovery.
The data on Wednesday added to a raft of other recent signals, including reports on employment and manufacturing, that have pointed to a slowdown in the economic recovery.
Consumer spending was one of the key pillars of support for the recovery in the first quarter, and the retail sales data led a number of economists to cut their forecasts for second-quarter growth.
"This points to further moderation in the pace of economic growth, which would suggest the recovery may need a helping hand from the Fed," said Millan Mulraine, a senior economist at TD Securities in New York.
Retail sales slipped 0.2 percent as demand for building materials sagged and declining gasoline prices weighed on receipts at service stations, a Commerce Department report showed. April's sales were revised to show a 0.2 percent drop.
Motor vehicle sales rose 0.8 percent, a surprise given that manufacturers reported a drop in the number of automobiles sold. Excluding autos, sales fell 0.4 percent, the biggest decline in two years, after dropping 0.3 percent the prior month.
"The question that remains unanswered is whether this weakness is merely a temporary payback from unexpected strength in sales earlier in the year or if the slowing trend will continue," said Jim Baird, chief investment strategist at Plante Moran Financial Advisors in Kalamazoo, Michigan.
"Evidence is starting to tip toward a broader slowdown, with the risk of a recession rising."
Separately, the Labor Department said its producer price index dropped 1.0 percent last month after slipping 0.2 percent in April as energy costs slumped 4.3 percent. Wholesale prices outside food and energy rose 0.2 percent for second month.
A combination of the worsening debt crisis in Europe and uncertainty over whether Congress will manage to stave off the scheduled expiration of various lower tax rates at year-end, dubbed the "fiscal cliff," is souring business and consumer confidence. Job growth has slowed in the past three months, with employers adding the fewest jobs in a year in May.
The slackening recovery has increased expectations of a further easing of monetary policy by the Fed, although economists are divided on whether the central bank will act when it holds its next policy meeting, on Tuesday and Wednesday.
A few think a third round of asset purchases - or quantitative easing - may be coming, while others believe the U.S. central bank is more likely to extend a program to re-weight bonds it already holds toward longer maturities to push long-term borrowing costs down further.
Others expect no action at all - at least not yet.
"We still believe the Fed would prefer to wait a bit longer on QE3 to see how the domestic and global situations play out, but the weak data certainly strengthen the argument for action," said Michelle Girard, a senior economist at RBS in Stamford, Connecticut.
The data and jitters ahead of this weekend's election in Greece weighed on U.S. stocks, which ended down. Prices for U.S. Treasury bonds rose, while the dollar fell against a basket of currencies.
While weak receipts at suppliers of building materials and service stations accounted for the bulk of the fall in sales last month, details of the report were generally in line with other recent data showing a step down in economic activity.
A Reuters poll published on Wednesday showed economists over the past month had trimmed forecasts for growth and hiring. Job gains are expected to average only 147,000 a month between now and October - too slow to do much to cut the nation's 8.2 percent jobless rate ahead of the presidential election.
The darkening picture is not good news for President Barack Obama, whose approval ratings have dipped to their lowest level since January, according to a Reuters poll published on Tuesday.
The weak retail sales numbers and a separate report on Wednesday that showed businesses accumulated inventories at a modest pace in April led some economists to cut their second-quarter growth estimates. JPMorgan lowered its forecast to an annual pace of 2 percent from 2.5 percent.
Sales last month were dragged down by the biggest drop in gasoline station receipts in five months as prices declined. Sales at building materials and garden equipment suppliers fell 1.7 percent.
But declining gasoline prices offer a silver lining in an otherwise darkening economic outlook and could free up households' discretionary income and help to keep inflation pressures contained.
So-called core retail sales, which exclude autos, gasoline and building materials, ticked up 0.1 percent after a similar gain in April. Core sales correspond most closely with the consumer spending component of the government's GDP report.
Economists said consumer spending - which accounts for 70 percent of U.S. economic activity - was on course to rise at a 2.1 percent rate this quarter. Spending grew at a 2.8 percent in the first quarter.
(Additional reporting Jason Lange in Washington and Anna Louie Sussman in New York; Editing by Dan Grebler)