WASHINGTON (Reuters) - Retail sales fell for a second straight month in May and wholesale prices dropped by the most in three years, raising prospects of additional monetary policy easing from the Federal Reserve to spur economic growth.
The reports on Wednesday added to a raft of other data, including employment and manufacturing, pointing to a downshift in the economic recovery. Consumer spending had been one of the key pillars of support for the economy in the first quarter, and the sales data led a number of economists to cut forecasts for second-quarter growth.
Analysts said the darkening outlook opened the door a bit wider to the possibility of a third round of so-called quantitative easing at a Fed meeting next week.
"We still believe the Fed would prefer to wait a bit longer on QE3 to see how the domestic and global situations play out, but the weak data certainly strengthen the argument for action," said Michelle Girard, senior economist at RBS in Stamford, Connecticut.
Retail sales slipped 0.2 percent as demand for building materials sagged and declining gasoline prices weighed on receipts at service stations, a Commerce Department report showed. April's sales were revised to show a 0.2 percent drop instead of the previously reported 0.1 percent gain.
Motor vehicle sales rose 0.8 percent, a surprise given that manufacturers reported weak unit sales during the month. Excluding autos, sales fell 0.4 percent, the biggest decline in two years, after dropping 0.3 percent the prior month.
Separately, the Labor Department said its producer price index dropped 1.0 percent last month as energy costs slumped 4.3 percent.
Tame inflation pressures should provide the Fed with some scope to aid the sputtering recovery.
The U.S. central bank meets on Tuesday and Wednesday of next week. A Reuters poll of economists last week put just over a 40 percent chance of the Fed extending its "Operation Twist" program aimed at pushing long-term interest rates lower.
"Inevitably, the easing inflation pressures will provide considerable room for monetary accommodation by the Fed, and if this disinflationary trend becomes entrenched, it may actually provide some justification for aggressive monetary policy action," said Millan Mulraine, senior macro strategist at TD Securities in New York.
U.S. stocks opened lower on the data, while prices for longer-dated U.S. Treasury bonds rose to session highs. The dollar fell against the euro.
While weak receipts at suppliers of building materials and service stations accounted for the bulk of the fall in sales last month, details of the report were mixed and added to signs of cooling demand.
Job growth has slowed in the past three months, with employers adding the fewest jobs in a year in May.
A combination of the worsening debt crisis in Europe and a looming so-called fiscal cliff at home are creating uncertainty that is souring both business and consumer confidence.
A Reuters poll published on Wednesday showed economists over the past month had trimmed their expectations for growth and hiring.
Economists now expect the economy to gain only 147,000 jobs a month, on average, between now and October - a pace likely too slow to do much to lower the nation's 8.2 percent unemployment rate ahead of the presidential election.
Retail sales last month were dragged down by a 2.2 percent drop in sales at gasoline stations after a decline of 1.4 percent in April.
Gasoline prices dropped 17 cents last month to $3.79 a gallon. Excluding gasoline, retail sales nudged up 0.1 percent after easing 0.1 percent in April.
But declining gasoline prices offer a silver lining in an otherwise darkening economic outlook and could free up households' discretionary income and help to keep inflation pressures contained.
Sales at building materials and garden equipment suppliers dropped 1.7 percent. So-called core retail sales, which exclude autos, gasoline and building materials, ticked up 0.1 percent after a similar gain in April.
Core sales correspond most closely with the consumer spending component of the government's GDP report.
Sales at restaurants and bars fell 0.2 percent, while receipts at sporting goods, hobby, book and music stores dipped 0.1 percent.
But there were bright spots in the report, with sales of electronics and appliances rising 0.8 percent and clothing store receipts advancing 0.9 percent. Sales at furniture stores rose 0.4 percent.
A third report showed applications for U.S. home mortgages, which includes demand for new loans and refinancings, rose 18 percent in the week ended June 8 to reach the highest level since 2009, the latest sign of a strong spring selling season.
Another report from the Commerce Department showed business inventories increased 0.4 percent to a record $1.58 trillion in April.
Inventories in April were lifted by a 1.9 percent rise in restocking by auto dealers, in line with strong demand for motor vehicles from households earlier this year. Auto inventories had increased 1.5 percent in March.