Retail sales drop worst in 2 years

NEW YORK (CNNMoney.com) -- Retail sales posted the biggest drop in nearly two years in June, the government reported Friday, fanning worries that consumers were starting to feel the pinch of higher gas prices and the slumping housing market.

"This report is a much weaker report than most analysts expected, and presumably it will come as a shock to people who bought retail stocks yesterday on the basis of [some] 'better' chain store numbers," Ian Shepherdson, chief U.S. economist with High Frequency Economics, wrote in a note Friday.

"The trend in the level of sales is still rising, but at a slowing pace. Gas prices are hurting and there's more pain to come," he added, which could be worrisome for retailers as they prepare for the back-to-school season, typically the second most-important selling season after the fourth-quarter holiday period.

The Commerce Department said retail sales fell 0.9 percent last month, the biggest monthly decline since a 1.5 percent drop in August 2005, after rising a revised 1.5 percent in May, which was the biggest gain in more than a year.

Auto sales sank 2.9 percent while gas station sales fell 1.1 percent. Economists surveyed by Briefing.com had forecast a flat reading overall.

Retail sales are watched closely since consumer spending fuels more than two-thirds of the economy.

Excluding autos and auto parts, which can be volatile from month to month, sales fell 0.4 percent in June from a revised 1.6 percent surge in May. Economists had forecast a 0.2 percent increase in ex-auto sales.

Retail categories across the board suffered sales declines. Among the biggest losers, furniture and home furnishing purchases tumbled 3 percent, building materials sales slumped 2.3 percent, clothing sales fell 1.4 percent, department stores sales dropped 1 percent and a 1.4 percent decline in consumer electronics purchases.

But there were a few positive spots. Sporting good sales rose a moderate 0.4 percent. General merchandise sellers increased their sales by 0.3 percent while sales at health and beauty supply stores rose 1.2 percent last month.

Friday's report came a day after some of the nation's biggest chain stores reported June sales at their stores open at least a year, a key measure of retail performance known as same-store sales.

June same-store sales numbers were a mixed bag, with Wal-Mart (Charts, Fortune 500), the world's largest retailer and the most closely-watched name in the group, delivering a surprising better-than-expected gain in its same-store sales.

However, Michael Englund, chief economist with Action Economics, cautioned against overreacting to a one-month pullback in spending.

"Retail sales in March and May were really strong while April and now June were weak. Overall the retail sales trajectory still looks pretty solid despite these swings," Englund said.

He also suggested weighing gas price and housing concerns against the national savings rate to better gauge the psyche of consumers.

"The savings rate was -1.4 percent in May. You would think that a negative savings rate is a bad thing but it also reflects the confidence of [American] consumers to keep spending," said Englund.

"So you have to put the meltdown in the housing market in the context of a spectacularly confident consumer and still steady income and jobs growth," he said.