By Bob Willis and Timothy R. Homan Oct. 15 (Bloomberg) -- The eroding U.S. economy drove retail sales into their longest slump in at least 16 years, even before this month's market collapse signaled a deepening recession. Consumer purchases fell 1.2 percent in September, extending the decline to three straight months, the first time that's happened since comparable records began in 1992, Commerce Department figures showed today. In another sign of weakening demand, prices paid to U.S. producers fell last month on lower fuel costs. Sales are slowing just as merchants prepare for the holiday selling season, on which they depend for the largest share of their revenue. San Francisco Federal Reserve President Janet Yellen said yesterday the U.S. may already be in a recession, and stocks dropped amid concern that the government's plans to inject capital into banks won't halt the economy's decline. ``I don't think things can get much worse,'' said Brian Bethune, chief financial economist at Global Insight Inc. in Lexington, Massachusetts. ``September was a terrible month in terms of the overall situation, in both sales and production. The fourth quarter is guaranteed to be a terrible quarter.'' An early regional gauge of manufacturing for this month showed production weakening in New York state as the freeze in global credit markets prompted businesses to pull back. The Federal Reserve Bank of New York's general economic index sank to the lowest level since it was first compiled in 2001. Producer Prices The Labor Department reported that prices paid to U.S. producers fell 0.4 percent in September, while so-called core producer prices that exclude fuel and food increased 0.4 percent. Falling oil prices and weaker consumer spending are making it harder for American companies to raise prices, giving the Fed scope to cut interest rates. Still, the costs for food and other household goods are higher than a year ago. Stocks slumped for a second day. The Standard & Poor's 500 Index declined 42.61 points, or 4.3 percent, to 955.4 as of 10:48 a.m. in New York. September's drop in retail sales was the largest since August 2005 and followed a 0.4 percent decline the prior month. Excluding autos, sales fell 0.6 percent. Both declines were more than economists had forecast. The median forecast of 75 economists surveyed projected purchases would drop 0.7 percent following a previously reported 0.3 percent decline the prior month. Estimates ranged from a fall of 1.5 percent to a 0.1 percent gain. Sales excluding automobiles were forecast to drop 0.2 percent from the prior month, according to the survey median. Eleven of the 13 main categories tracked by Commerce showed a drop in demand last month, led by a 3.8 percent slump at auto dealers. Carmakers see little relief in sight. Little Relief Seen ``We continue to see the trend of the past couple of months,'' Ford Motor Co. North American chief Mark Fields said in the Ford plant in Dearborn, Michigan. GMAC LLC, the lender once owned by General Motors Corp., said this week it will grant financing only to buyers with credit scores of at least 700, who represent about 58 percent of U.S. consumers. Industry figures earlier this month, which are the ones used to calculate gross domestic product, showed cars and light trucks sold at a 12.5 million annual pace in September, the fewest since 1993. October sales may drop to an 11 million pace, the first time the rate has dropped below 12 million since April 1983, according to an estimate by an analyst at Deutsche Bank AG. Sales at furniture stores dropped 2.3 percent, the most since February 2003, and purchases at clothing outlets decreased by the same amount, the most this year. Americans cut back on visits to restaurants and bars, where sales dropped 0.5 percent, the most since January 2007. Gap, Macy's Weakening demand at merchants such as Gap Inc., J.C. Penney Co. and Macy's Inc. also hurt total purchases, signaling retailers may be heading for the worst holiday shopping season in six years. Terry Lundgren, chief executive officer at Macy's, the second-biggest U.S. department-store chain, forecast a recovery in sales won't begin until the second half of next year. ``The most important issue for us is jobs,'' Lundgren said in an Oct. 10 telephone interview. ``That's what has to stabilize. If you lose your job, that affects everything.'' Excluding autos, gasoline and building materials, the retail group the government uses to calculate GDP figures for consumer spending, sales dropped 0.7 percent, after a 0.4 percent decrease in August. The government uses data from other sources to calculate the contribution from the three categories excluded. Service Stations The only categories registering gains last month were service stations, with a 0.1 percent increase, and health and personal care stores, where sale rose 0.4 percent. Consumer spending fell at an annual rate of 2 percent in the third quarter, bringing to a halt a record expansion that began in 1992, according to the median estimate of economists surveyed in the first week of October. Purchases will probably drop at a 0.9 percent pace in this quarter and be unchanged in the first three months of 2009, the projections also showed. The U.S. has lost 760,000 jobs in the first nine months of the year and the jobless rate was unchanged at a five-year high of 6.1 percent in September, the Labor Department reported earlier this month. Congress passed a $700 billion bank rescue package this month to thaw credit markets frozen by mounting losses on mortgage-backed securities. The plan will include direct cash infusions, government purchases of preferred stock in the nation's biggest banks, and guarantees on new debt. The Fed, as part of a concerted effort with other central banks, cut the target on its benchmark rate by a half point last week and Chairman Ben S. Bernanke signaled policy makers are ready to lower borrowing costs again should the markets not stabilize. To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net

Source