U.S. consumers cut spending in February and the labor market continued to weaken, suggesting the household-spending pillar that had supported the economy's expansion may be giving way.
Retail sales unexpectedly plunged 0.6 percent last month, while the ranks of workers remaining on state unemployment benefit rolls hit the highest level in nearly 2-1/2 years in the final week of February, government reports on Thursday showed.
Now the growing credit crunch that has wreaked havoc on Wall Street is settling in on Main Street.
Consumers, who fuel roughly two-thirds of economic growth, held back on spending in a wide range of areas amid surging food and energy costs and a decline in wealth as their home values tumbled.
"This is a downward spiral consistent with a recession," said Kurt Karl, chief economist at Swiss RE in New York.
"Because consumer prices are so elevated, we're seeing the hits on the consumer. They can't finance it and we've got a credit market crunch."
Many Wall Street firms believe the economy is already in recession. JPMorgan Chairman and Chief Executive Jamie Dimon on Wednesday warned that further deterioration in the housing market, suffering the worst performance since the Great Depression, is expected and will be unprecedented.
"Financial conditions are getting more extreme," Dimon said, adding that more is needed from the Federal Reserve and the Bush administration to ease the growing financial crisis.
The dismal data left Wall Street analysts all but certain the Fed will reduce interest rates by 75 basis points by Tuesday, when the next policy meeting is scheduled.
The dollar continued on its downward spiral, sinking against the euro and the yen. Prices for government debt held steady at higher levels on the expectations for weaker interest rates and U.S. stocks tumbled on the weaker-than-expected retail sales data.
Economists were expecting a 0.2 percent rise in retail sales after an upwardly revised 0.4 percent gain in January. Excluding autos, sales fell 0.2 percent in February, a weaker reading than the 0.2 percent gain economists had forecast.
The White House was quick to allay concerns among consumers about the economy's prospects.
"The big message is that you can have confidence in the long-term future of our economy. We are going to see the benefits of the tax release and the economic growth package coming on line," said White House spokesman Tony Fratto.
U.S. regulators, in a review of capital markets released Thursday recommended higher capita requirements and better disclosure of risky investments. The report also outlined new consumer protections for the mortgage lending industry.
The latest government report on consumer spending added further evidence that housing and credit troubles have spread more broadly into the economy.
Excluding gasoline, building materials and autos, spending was flat after a 0.3 percent gain in January, showing a damaged economy well beyond the weakened housing and credit markets.
"The slowdown that we know is happening in the banks has manifested itself on Main Street," said Joe Francomano, vice president for foreign exchange at Erste Bank in New York.
Labor Market Weakens
A separate report showed the U.S. labor market was still weakening.
The number of U.S. workers applying for unemployment benefits was unchanged last week at 353,000, slightly below expectations. However, the number of unemployed remaining on jobless aid at the end of February was the highest in nearly two and a half years, the Labor Department said.
While consumers have begun cutting back on spending, it was a somewhat different story at businesses.
Stockpiles of goods at U.S. businesses rose in January by the biggest amount since 2006 and sales experienced their largest increase in nearly a year, a separate Commerce Department report showed on Thursday.
The stock-to-sales ratio, which measures how long it would take to empty inventories at the current pace, dropped to 1.25 months' worth from 1.26 months' in December, matching a record low set in November.