updated 2/14/2007 5:23:39 PM ET 2007-02-14T22:23:39

Retail sales, hurt by a big drop in auto purchases, slowed at the start of the year and business inventories turned in the poorest showing in 17 months.

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The Commerce Department reported Wednesday that retail sales essentially were flat in January, the poorest performance since a 0.2 percent decline in October.

Business inventories, the department said, basically were unchanged in December at $1.37 trillion, $147 million less than in November. It was the weakest showing for inventories since they fell by 0.4 percent in July 2005.

The inventory report included a 0.5 percent plunge in stockpiles held by wholesalers. Retailers boosted inventories by 0.3 percent. That reflected gains in many categories but declines at auto dealers, who still are trying to reduce an overhang of unsold cars. Manufacturers raised inventories by 0.1 percent.

The latest reports provide fresh figures showing the economy was not performing as well as previously thought at the turn of the year.

Analysts said the slowdown in retail sales in January was not too worrisome given that it followed a 1.2 percent surge in December sales.

“With the help of gift cards, consumers kept spending early this year though maybe not as excessively as they had been,” said Joel Naroff, chief economist at Naroff Economic Advisors.

On Wall Street, the Dow Jones industrial average closed at a new high. Federal Reserve Chairman Ben Bernanke, in congressional testimony, predicted the economy would grow modestly this year and inflation would continue to ease.

The Dow closed up 87.01 points at a new record of 12,741.86. It was the 28th record close since the start of October.

A string of weaker-than-expected numbers is causing economists to reduce their estimates for overall growth, as measured by the gross domestic product, for the final three months of last year.

They now believe the GDP was growing at an annual rate of just 2.5 percent, a full percentage point below the government’s initial estimate of 3.5 percent GDP growth in the final quarter of 2006.

Analysts had expected a gain of 0.3 percent in retail sales rather than the flat reading. That forecast was based on reports from big chain stores that customers busily redeemed their Christmas gift cards in January and snapped up coats and other winter gear with the delayed arrival of frigid weather.

Sales at department stores did show strength during the month. That, however, was offset by a 1.3 percent decline in sales of autos — the biggest one-month drop since 2.4 percent last June.

Excluding the decline in autos, retail sales managed a 0.3 percent increase. This gain, however, was lower than the 0.4 percent rise Wall Street expected.

Consumer spending is closely watched because it accounts for two-thirds of total economic activity.

For January, gasoline station receipts fell by 0.7 percent, reflecting a decline in pump prices. The retail sales numbers are adjusted for normal seasonal variations but they are not adjusted for inflation. Excluding the drop in gasoline sales, retail sales would have risen 0.1 percent.

Sales at department stores and other general merchandise stores were up a solid 1.3 percent, the biggest one-month gain in a year.

Sales were also strong at furniture stores, up 0.8 percent, and hardware stores, which posted a 0.8 percent gain. Such increases might reflect that the worst of the housing slump is over.

Sales at electronic and appliance stores, which had boomed with Christmas demand for the latest electronic gadgets, fell by 1.2 percent in January.

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