Figures confirm retailers had little holiday cheer

Report calls it worst Christmas season in 5 years

By MARTIN CRUTSINGER
Associated Press

WASHINGTON — Consumer spending, the critical bulwark that has kept the country out of recession, is showing signs of cracking. Retail sales plunged by 0.4 percent last month as consumers handed retailers their worst Christmas in five years. Consumers have been battered by a sinking housing market, rising unemployment and the credit crunch.

The Commerce Department's sales report Tuesday was just the latest in a string of weaker-than-expected numbers that have economists worried that the current economic expansion, now in its seventh year, is faltering.

Analysts said the worry is that all the problems weighing on the economy could prompt consumers — who account for two-thirds of economic activity — to sharply limit or even stop shopping. Already, consumer confidence has slipped significantly amid the oil price spiral and the continuing housing slump. At the same time, some of the nation's biggest financial institutions have reported billions of dollars in losses stemming from a meltdown in the mortgage market.

Former Federal Reserve Chairman Alan Greenspan said the country may already be in a downturn.

"The symptoms are clearly there," he said in a Wall Street Journal interview. "Recessions don't happen smoothly. They are usually signaled by a discontinuity in the marketplace, and the data of recent weeks could very well be characterized in that manner."

Stock prices, one of the leading indicators used to judge the course of the economy, continued their 2008 swoon.

9-month low for Dow

The Dow Jones industrial average fell 277.04 points to close at 12,501.11, the lowest close in nine months. Investors were rattled by an announcement from Citigroup that it had sustained a nearly $10 billion loss in the fourth quarter, reflecting in part the mortgage market.

Broader stock indicators also lost ground. The Standard & Poor's 500 index dropped 35.30 to 1,380.95, and the Nasdaq composite index lost 60.71, closing at 2,417.59.

In other news Tuesday, the Labor Department said wholesale inflation, which had shot up in November by 3.2 percent, the largest amount in 34 years, dipped by 0.1 percent in December. That reflected a drop in energy costs at the time. However, for all of 2007, wholesale prices rose by 6.3 percent, the biggest annual increase in 26 years.

Analysts said the dip in wholesale prices for December, if followed by a benign report today on consumer prices, should give the Federal Reserve the leeway it needs to more aggressively attack the slowdown with interest rate cuts.

Federal Reserve Chairman Ben Bernanke last week sent a strong signal that the central bank is more worried at the moment about weak growth than inflation, prompting markets to believe the Fed will cut a key interest rate by a half-point at the end of this month.

Favoring Democrats' plans

Also Tuesday, the Congressional Budget Office said economic stimulus proposals favored by Democrats, including tax rebates, extended unemployment benefits and a temporary increase in food stamps, are cost-effective ways for Congress to try to lift the economy.

At the same time, the office said, some options floated by Republicans such as extending President Bush's tax cuts, cutting corporate tax rates and giving businesses new incentives to invest may be less cost-effective in the short term.

The nonpartisan Congressional Budget Office echoed the views of many economists who say the most effective way to stimulate the economy is to provide money — through tax cuts or direct payments such as food stamps — to people most likely to spend it quickly.