Retail Sales Sag 2.7% in December; Stocks Drop

The Commerce Department reported Wednesday that retail sales
dropped 2.7 percent last month, more than double the 1.2 percent decline that
Wall Street expected.

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

Lower consumer spending has been a key factor to the
economy’s current problems. Analysts predict the current recession, already the
longest in a quarter-century, will continue at least until the second half of
this year, the Associated Press reported.

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

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 the housing market.

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.

Stocks plummeted Wednesday as fears of more credit losses in
the banking sector and signs of further contraction in consumer spending
compounded worries about the toll of the worsening recession.

Bank stocks were top drags, with Citigroup sliding 14
percent in early trading, while shares of JPMorgan and Bank of America fell 4
percent and 2 percent respectively.

The fall in shares of Citigroup, a Dow component, came a day
after the embattled bank agreed to sell a controlling stake in its crown jewel
unit, the Smith Barney retail brokerage, to Morgan Stanley for $2.7 billion.

Analysts have said the Smith Barney sale was a precursor to
the break-up of Citigroup and suggested the bank must be urgently seeking to
replenish capital due to mounting losses.

The Dow Jones industrial average slid 277.01 points, or
3.28 percent, to 8,171.55 in early Wednesday trading. The Standard & Poor’s
500 Index tumbled 29.99 points, or 3.44 percent, to 841.80. The Nasdaq
Composite Index dropped 48.07 points, or 3.11 percent, to 1,498.39.

Oil slipped back towards $38 a barrel the retail sales
figures depressed stock markets and hit the dollar. In December, gasoline sales
tumbled 15.9 percent after diving by a record 18.3 percent in November. Sales
in department stores fell 2.3 percent in December following a 1.7 percent gain
in November.

“The retail sales figures are horrible. They confirm
that the United States is in recession, which means oil demand is falling and
so the market is weakening,” said Rob Laughlin, senior oil analyst at MF
Global, according to Reuters.

“Subject to the U.S. oil data today being in line with
forecasts, then I think prices can keep going down.”

U.S. government reports due later Wednesday were expected to show crude oil stocks rising for
the third consecutive week, by more than 2 million barrels. U.S. crude oil
stocks have swelled as demand in the top oil consumer has wilted, pushing U.S.
crude into a deep discount compared with Brent crude.

On a brighter note, mortgage applications rose last week,
spurred by a surge in demand for refinancing. The Federal Reserve reduction of
its benchmark interest rates to virtually zero and a pledge to ensure financial
markets are flush is helping to lower mortgage rates.

However, low mortgage rates have yet to fuel demand for
loans to purchase homes. The Mortgage Bankers Association said its index
measuring mortgages to buy homes fell 14.1 percent last week.

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.