updated 2/10/2008 1:52:48 PM ET 2008-02-10T18:52:48

Americans are paying more attention to how much they spend on each box of cereal, tank of gasoline and pair of pants — and Wall Street is, too.

Major Market Indices

This week’s data on the U.S. consumer, particularly the Commerce Department’s Wednesday report on January retail sales, are going to be monitored closely by investors for clues to how sunken home prices, high energy costs and job cuts are affecting spending.

“Retail sales are a big indicator at this point of the mindset of the consumer,” said Kim Caughey, equity research analyst at Fort Pitt Capital Group. Government data and company executives alike have suggested that U.S. consumers are having to pare back their discretionary spending to buy necessities.

After the generally dismal sales figures reported by individual retailers last week, economists polled by Thomson Financial/IFR last Friday predicted that the government would say that overall retail sales dipped 0.3 percent in January after a similar slump in December.

“If it comes in well below what’s expected, that could send the market into another tailspin,” said Jennifer Ellison, principal at San Francisco-based Bingham, Osborn & Scarborough, which manages $2.1 billion in investments.

Then on Friday, the University of Michigan will release its preliminary February reading on consumer sentiment. It is not a perfect predictor of how Americans will spend their money, but it will serve as the most up-to-date reading on how they are feeling about the economy.

“It’s pretty widely anticipated that consumer sentiment is declining,” Ellison said.

After posting its best week since March 2003, the Dow Jones industrial average last week logged its worst week since that same volatile month due to a sharply contracting service sector, uneasiness about bond insurers and other worrisome signs that the housing and credit markets may keep stifling growth.

The Dow fell 4.40 percent last week, the Standard & Poor’s 500 index lost 4.60 percent, and the Nasdaq composite index dropped 4.50 percent. The Dow stands 14 percent below its Oct. 9 record close of 14,164.53, but remains about 4.7 percent above the 15-month lows it sank to in January.

Many market watchers say it is practically inevitable that the Dow will retest its lows — essentially, fall back to those levels while investors wait and see if it falls further or bounces back up. Wall Street is hoping the bulk of the weakness in the economy has passed, whether it counts as a recession or not. If it’s mostly over, the stock market may have already hit, or neared, its bottom.

“If we’re in a recession now, which is pretty likely, we’ve probably seen most of the worst of the downside to the stock market,” Ellison said. “The market tends to rebound when the economy reaches its worst quarter.”

Earnings from companies this week — including Hasbro Inc., General Motors Corp., Coca-Cola Co., Deere & Co., Vonage Holdings Corp., and Goodyear Tire & Rubber — could be indicative of spending patterns by both individuals and businesses.

Discussions about the global economy from the weekend’s Group of Seven meeting in Tokyo of the world’s finance ministers may also move the market this week.

According to S&P analyst Howard Silverblatt, stock markets around the globe lost a combined $5.2 trillion in January, one of the worst ever starts to the year. Emerging markets on average dropped more than 12 percent, and all 26 developed markets tumbled as well, by an average of nearly 8 percent.

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