updated 3/13/2008 1:08:44 PM ET 2008-03-13T17:08:44

Consumers, battered by plunging home prices and a credit crunch, stayed away from the malls in February, pushing retail sales down by a larger-than-expected amount. It was another worrisome sign that the country could be falling into a recession.

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The Commerce Department reported Thursday that retail sales fell by 0.6 percent last month, far worse than the 0.2 percent increase that analysts had been expecting.

The weakness was widespread with sales of autos, furniture and appliances all down.

It marked the second time in the past three months that retail sales have taken a tumble. Sales had fallen by an even bigger 0.7 percent in December, the largest drop in six months, as the nation’s retailers suffered through a dismal holiday shopping season. Sales posted a modest 0.4 percent gain in January.

Consumer spending is closely watched because it accounts for two-thirds of total economic activity. Many economists believe that the country will suffer a mild recession in the first half of this year as the economy is unable to withstand the blows from a prolonged slump in housing, record-high energy prices and a severe credit crisis brought on by soaring mortgage defaults.

At the White House, deputy press secretary Tony Fratto said the Bush administration expected that this quarter would be a “difficult and challenging” period for the U.S. economy as it deals with the fallout in housing and higher energy prices.

He said that the message to consumers is that they should have confidence in the long-term future of the economy because the benefits of tax relief and the economic stimulus package are “coming on line,” and the Federal Reserve is taking measures that will allow growth to return to the economy.

Bush is headed to New York on Friday to deliver a speech on the economy.

“I think it’s important for the president to get out and talk about how he sees the economy, and why he sees the economy improving as the year goes on,” Fratto said. “We do have this economic growth package in place. We are taking aggressive action on one of the root causes for the slowdown in the economy, and that’s in the housing sector. ... What the president will be doing is, again, being very transparent and clear about what the economy looks like today, what are the activities that we are doing to strengthen it, the economy, as the year goes on.”

In another report, the Labor Department said Thursday that the number of laid-off workers filing applications for unemployment benefits was unchanged this past week at 353,000, the same number as last week. That was a slightly better showing than analysts had been expecting although the benefit applications remain at elevated levels indicating the labor market is under stress.

The government reported last week that employers slashed payrolls by 63,000 in February, the second straight monthly decline in employment and the most dramatic evidence to date that the country could be sliding into a recession.

A third report Thursday showed that U.S. import prices rose last month by 0.2 percent after jumping an even larger 1.6 percent in January. Compared to a year ago, import prices are up a sharp 13.6 percent, reflecting the fact that petroleum prices are up 60.9 percent over the past year.

The rising cost of imported goods reflects the bind the Federal Reserve faces at the current time as it must deal with the twin threats of a sluggish economy and higher inflation.

Analysts expect that the Fed will continue to emphasize its battle against recession and cut interest rates sharply when officials hold a regularly scheduled meeting on Tuesday.

Meanwhile, the government said that inventories held by businesses on shelves and backlots shot up by 0.8 percent in January, the largest amount in nearly two years. That gain was much larger than the 0.5 percent increase that had been expected and it followed a sizable 0.7 percent rise in December.

The big jump likely reflected an unwanted rise in inventories as business confidence falters in the face of the sharp slowdown in overall economic activity.

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