Signs of slowdown adding up

WASHINGTON — Consumers kept spending last month and factories kept producing, but the gains were weaker than expected as financial-market turbulence and a slumping housing market continued to weigh on the economy.

Analysts said the new economic reports released Friday give the Federal Reserve more reasons to cut a key interest rate when policymakers meet next week.

The Commerce Department said retail sales increased 0.3 percent last month with the strength led by a 2.8 percent jump in auto sales, the biggest increase in this category in more than a year.

Separately, the Federal Reserve said industrial output edged up by 0.2 percent last month, with all of the strength coming from a boost in utility production in response to an August heat wave. Manufacturing dropped for the first time since February.

Analysts said the lackluster showing for sales and production added pressure on the Fed to start cutting interest rates to make sure the financial-market turmoil of the past month does not push the country into a recession.

"Consumers have turned more cautious under the weight of the weakening housing market, high gasoline prices and now a fragile job market," said Mark Zandi, chief economist at Moody's Economy.com. "The retail sales number is just one more reason for the Fed to lower rates."

Consumer confidence, as measured by the RBC Cash Index, fell to 71.1 earlier this month, the worst showing since May 2006.

The retail-sales performance would have been much weaker without the big auto-sales gain last month. Excluding autos, retail sales would have fallen by 0.4 percent, the poorest showing in nearly a year.

Part of the weakness in August retail sales came from a 2.4 percent drop in revenues at gas stations, reflecting declining prices. However, with oil rising to new records above $80 per barrel, analysts predicted that gasoline prices will start rising again, a factor that will mean consumers will have less to spend.

Sales at department and general merchandise stores edged up 0.3 percent last month, reflecting strong back-to-school sales.

The worry is that consumer spending, which accounts for two-thirds of total economic activity, could falter in coming months, dragging the country into a full-blown recession. The government reported last week that businesses cut 4,000 jobs last month, the first job losses in four years.

Treasury Secretary Henry Paulson said Friday he believed the economy could avert a downturn, in part because the rest of the world is growing at a robust pace, helping to boost U.S. exports.

Financial markets have been roiled since early August by rising worries that loans to consumers and businesses are becoming harder to obtain as lenders tighten standards.

Paulson said there has been "some modest improvement in a number of markets that are under stress" but that the current credit crisis will take some time to unwind.

"The complexity of certain of the products and the fact that we are more integrated into the global economy mean that it is going to take awhile to work our way through this," Paulson said in an interview on CNBC. "I feel very confident this economy is going to continue to grow."