The overall decline — the first since September — was reported by the Commerce Department Thursday. It largely reflected a sharp drop in sales of automobiles. When auto sales — which tend to swing widely from month to month — are removed, sales at all other merchants rose by a strong 0.9 percent in January — the biggest gain in five months.
Consumers opened their pocketbooks and wallets in January to buy clothing, food, sporting goods, books and music, and electronics and appliances. But those gains were more than offset by cutbacks in spending to buy cars and to purchase building and garden supplies, thus producing the overall decrease in sales.
"Demand is solid but not surging," Ian Shepherdson, chief U.S. economist for High Frequency Economics, told CBS MarketWatch. "Our measure of core sales, which excludes autos, gas and food, rose a healthy but unspectacular 0.5 percent, in line with the average gain for the previous four months."
In other economic news, the Labor Department reported that new claims for unemployment insurance rose last week by a seasonally adjusted 6,000 to 363,000, a two-month high. Part of the increase was blamed on bad weather in the Southeast, which forced weather-sensitive companies to lay off workers.
A Labor Department official told CBS MarketWatch the increases in jobless claims over the past two weeks should not be taken as a sign of a deteriorating labor market.
"The numbers are still impacted by inclement weather," he said.
Businesses — feeling more confident about economic conditions — boosted inventories by 0.3 percent in December, the Commerce Department said in a second report. It marked the fourth month in a row that businesses added to their stocks. Businesses' sales, meanwhile, rose by 0.9 percent in December, the largest increase since September.
The overall retail sales figure showing a 0.3 percent dip was weaker than the flat showing economists were expecting. But sales — excluding automobiles — was stronger than the 0.5 percent increase they were forecasting.
Thursday's retail sales report suggested that consumers still have an appetite to spend but they are being more selective.
Consumers are important to the economy because their spending accounts for roughly two-thirds of all economic activity. Throughout the economic slump and into last year's recovery, consumers pretty much carried the economy. But businesses have finally begun to do their part by boosting capital spending — a key ingredient to keep the expansion going.
Private economists are hopeful that any moderation in consumer spending will be more than compensated by strength in other parts of the economy. The economy is expected to grow at a rate of more than 4 percent in the current January-to-March quarter, a solid performance, analysts say.
Federal Reserve Chairman Alan Greenspan is optimistic about the economy's prospects this year and is hopeful that businesses will hire more people in the coming months. Job growth has been painfully slow — a vulnerable point for President Bush and an issue that Democrats, who want Bush's job, like to point out to voters in an election year.
The 0.3 percent decline in retail sales in January came after a modest 0.2 percent rise in December.
Much of the weakness suggested in January's sales figure came from a 3.9 percent decline in sales at automobile dealerships. That represented the largest decline in 11 months and followed a 0.2 percent increase in December.
Sales of building and garden supplies fell by 0.9 percent in January, reflecting bad weather in some parts of the country. That came after a 0.6 percent rise in December.
Shoppers, however, showed more of an appetite for other goods. Sales of clothing rose by 2.9 percent in January — the biggest increase since October 2002 — and a turnaround from a 0.2 percent decline in December.
Sales of sporting goods, music and books went up by 1.6 percent last month — the largest increase since August — and even better than a 0.6 percent increase posted in December.
Food stores saw sales rise by 1.8 percent in January — the biggest increase since December 1999 and an improvement from the 0.4 percent drop the month before. At department stores, sales rose by 0.5 percent — the best showing since July — after being flat in December.
Consumers also ate out more in January. Sales at bars and restaurants rose by 1.1 percent, up from a 0.5 percent increase in December.