U.S. retail sales, producer prices give cautionary signs on economy

U.S. retail sales declined in September and producer prices also fell, worrisome signals on the economy's health that heightened financial market worries over faltering global growth.

The two reports on Wednesday could deepen concerns at the Federal Reserve over the readiness of the U.S. economy to absorb a hike in interest rates that many policymakers have said would likely come around the middle of next year.

Retail sales, which account for about one-third of consumer spending, dropped 0.3 percent last month after a 0.6 percent gain in August, the Commerce Department said. It was the first decrease since January.

Economists had expected a decline given a slower pace of sales reported by automakers and a drop in gasoline prices that would have cut into receipts at service stations.

But what came as a surprise was that the weakness was so broad-based. A gauge of so-called core sales, which strips out automobiles, gasoline, building materials and food services, and corresponds most closely with the consumer spending component of gross domestic product, fell 0.2 percent. Economists polled by Reuters had expected it to rise.

"Consumers have turned more cautious," said Ted Wieseman, an economist at Morgan Stanley in New York, who cut his third-quarter GDP growth forecast to 3.1 percent from 3.4 percent on the figures.

Prices for U.S. stocks dropped about 1 percent and yields on U.S. government debt fell sharply.

The United States had looked like a bright spot in a slowing global economy, but Wednesday's data took away some of that shine.

Sales at clothing retailers dropped 1.2 percent and receipts at sporting goods shops edged 0.1 percent lower. Overall sales would have fallen further but for the release of a new version of Apple's (AAPL.O) flagship cellular phone, which helped sales at electronics and appliance stores rise 3.4 percent.

Receipts at auto dealerships fell 0.8 percent, as did sales at service stations. The drop in gasoline sales reflected declining oil prices and is potentially positive for the broader economy as it could free up income to spend on other things.

Separately, the Labor Department said prices received by U.S. producers fell 0.1 percent in September, the first decline in over a year.

While many indicators have pointed to a strengthening U.S. economy, policymakers at the Federal Reserve are concerned that inflation has been stuck below their 2 percent target.

The Fed targets inflation felt by consumers, but the producer price report can point to inflation pressures down the road. And Wednesday's report suggests these are generally lacking. "Little inflation pressure (is) in the pipeline," economists at RBS said in a note to clients.

Producer prices rose 1.6 percent in the year through September, the lowest annual reading in six months and down two tenths from August's print. A third report showed U.S. business inventories in August posted their smallest gain since June 2013.