Business

NEW YORK (CBS) ― Wall Street expected December to bring bad news for retailers - but not this bad. Retail sales plunged more than double what analysts predicted, marking a record sixth straight monthly decline as consumers tightened their purse strings amid a deepening recession, a severe credit crunch and a battered job market, none of which are likely to ease anytime soon.

The Commerce Department reported Wednesday that retail sales dropped 2.7 percent last month. Wall Street expected a 1.2 percent decline.

"The numbers have to be construed as terrible," retail analyst Ken Perkins told CBS Radio News. "They were way below the consensus."

For the entire year, retail sales were down 0.1 percent, a sharp turnaround after a 4.1 percent gain in 2007. It was the first time the annual retail sales figure has fallen on government records going back to 1992. Before 2008, the weakest year for retail sales had been an increase of 2.4 percent in 2002, the year after the 2001 recession.

The weakness in consumer spending has been a prime contributing factor to the economy's current swoon and analysts say they don't see that turning around soon. They predict the current recession, already the longest in a quarter-century, will continue at least until the second half of this year.

"It's got to be pretty dire, at least for the first half of this year," Perkins told CBS Radio News. "There really are no stimulus or incentives to spend on the part of consumers. Credit remains tight, if you're not refinancing your home."

On Wednesday, regional department store chain Gottschalks Inc. put itself up for sale and said it had filed to reorganize in a Chapter 11 bankruptcy. The Fresno, Calif.-based company said it has negotiated $125 million debtor-in-possession financing from a group of lenders led by GE Capital, which if approved in bankruptcy court, will fund its employee wages and benefits, some vendor payments and other operating expenses while it reorganizes.

"Anybody in the department store space right now has been struggling for quite a long time and if you're a regional player in that field … there's some pressure there," Perkins told CBS Radio News.

Last week, Macy's Inc. said it will close 11 underperforming stores in nine states, affecting 960 employees. The department-store operator also lowered its forecast for the fourth quarter after one of the weakest holiday seasons in years.

The 2.7 percent December plunge in sales, which followed a November drop revised downward to 2.1 percent, confirmed private sector reports that retailers had suffered their worst holiday shopping season since at least 1969.

Meanwhile, businesses slashed inventories in November by the largest amount in seven years as they scrambled to cope with a record plunge in sales.

The Commerce Department says that inventories were reduced by 0.7 percent in November, even worse than the 0.5 percent drop analysts expected. It marked the third straight month that businesses have cut their stockpiles, the longest stretch since four straight months of reductions that ended in August 2003.

The big drop in inventories in November reflected a record 5.1 percent drop in total business sales that followed a 3.9 percent decline in October.

Since consumer spending accounts for about two-thirds of total economic activity, the weakness is a major factor depressing overall economic activity. The country fell into a recession in December 2007, reflecting a severe slump in housing.

The economy's weakness intensified in the fall when the financial system was engulfed in its biggest crisis since the 1930s as billions of dollars of losses on mortgages and other types of loans forced the government to put together a massive rescue effort to try to get banks to resume more normal lending.

President-elect Barack Obama has promised to push a sweeping economic stimulus program of around $800 billion through Congress in the next few weeks, but even with that assistance, economists say the country is facing a prolonged period of weakness.

Many analysts believe the overall economy, as measured by the gross domestic product, plunged at an annual rate of 6 percent in the just-completed fourth quarter after dropping by 0.5 percent in the third quarter.

On Wall Street, stocks fell sharply in morning trading. The Dow Jones industrial average was down about 180 points, and all the major indexes were down more than 1.5 percent.

For December, virtually all areas of retail sales showed declines. Auto sales fell by 0.7 percent and are down a huge 22.4 percent from a year ago.

Excluding autos, retail sales were down a record 3.1 percent. This reflected declines at department stores, specialty clothing stores, furniture stores, hardware stores, restaurants and service stations. The 15.9 percent drop at service stations was heavily influenced by the steep decline in gasoline prices during the month.

Automakers closed out a dismal 2008 with General Motors Corp. having its worst year in nearly a half-century and both GM and Chrysler LLC having to take emergency loans from the government's bailout fund.

Last week, the nation's major chain stores reported dismal sales results for December. Even Wal-Mart Stores Inc. reported smaller gains than economists expected. Among the retailers reporting big declines were Sears Holdings Corp., which operates Sears and Kmart stores, luxury retailer Saks Inc. and Gap Inc.

Departing Wal-Mart Chief Executive Lee Scott on Monday told the annual National Retail Federation convention that while a new economic stimulus package from the government will have "some impact" on the economy, he doesn't expect a quick rebound since "fundamental changes" in consumer behavior - an increased focus on saving and less buying - will likely linger.

Scott, who was making his last public speech as CEO and president of the world's largest retailer, predicted that the first half of 2009 will be "extremely challenging," and said he hopes the second half would be a little easier.

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