updated 1/16/2006 5:01:37 PM ET 2006-01-16T22:01:37

Retail sales are projected to increase a modest 4.7 percent this year, much less than the 6.1 percent gain in 2005 as higher energy prices, a still shaky labor market and a slowdown in the housing market dampen spending, the National Retail Federation said Monday.

In an address to retailers on the second day of the industry’s four-day annual convention, Tracy Mullin, CEO of the world’s largest retail trade association, said merchants face “myriad challenges” as consumers struggle to find new sources of spending power as home equity refinancing slows. The association also noted that the retail industry needs solid employment growth in 2006 to sustain healthy wage and salary growth, key factors in consumer spending.

The National Retail Federation said that in the first quarter, total retail sales should increase 5 percent compared to a year ago. That’s less than the 6.5 percent gain achieved in the fourth quarter of 2005. Total retail sales exclude business from auto dealers, gas stations and restaurants.

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