WASHINGTON - US retail sales fell unexpectedly in December to close out the weakest year at the cash register since 2002, data showed on Tuesday, the strongest signal yet that the economy may be sliding into recession under the weight of a housing and credit crisis.

At the same time, while prices at the farm and factory gate showed their biggest annual increase in more than 25 years last year, they dipped in December. That suggested the Federal Reserve may have room to cut interest rates more to stave off an economic contraction.

The Commerce Department said retail sales dropped 0.4 per cent last month and it revised down November's sales gain to 1 per cent from a previously reported 1.2 per cent.

Stock prices remained in deeply negative territory in afternoon trading, weighed down by investor fears of pending recession and concern over a bigger-than-expected loss at Citigroup Inc , which said it was cutting jobs and again raising capital from abroad.

Seeking help abroad
Merrill Lynch said it was issuing US$6.6 billion (S$9.41 billion) in preferred shares to investors, including the Kuwait Investment Authority, as it continues to look overseas to boost its capital after being hit by losses on subprime mortgages.

Last month, Merrill sold a stake in itself to the Singapore government and an asset manager, raising as much as US$7.5 billion.

Bond prices rose as traders bet that Fed policy-makers will cut interest rates aggressively when they meet at the end of this month amid evidence of softening consumer demand.

Fed Chairman Ben Bernanke said last week the US central bank was ready to take 'substantive additional action' to support growth and provide 'insurance' against a downturn.

Mr Bernanke is set to testify before Congress this Thursday on the economy's short-term outlook and lawmakers who are working on their own economic stimulus plan are expected to press him on what is most needed to keep expansion going.

A report on Tuesday from the Congressional Budget Office, requested by Democratic chairmen of the Senate and House of Representatives budget committees, said the goal should be to get money into the hands of low-income consumers quickly because they will most likely spend it.

Senate Budget Committee Chairman Kent Conrad, a North Dakota Democrat, said a 'targeted and temporary' stimulus package that does not add to the national debt might be able to be enacted quickly with bipartisan backing.

Let's talk
The Bush administration is considering economic stimulus measures but Democratic leaders want the White House to agree to work with them on a final plan, which many believe is likely to include rebates to individuals.

The White House has pressed Congress to make permanent tax cuts that are scheduled to expire in 2010, arguing that is necessary to build confidence among consumers that their taxes would stay low.

But Treasury Secretary Henry Paulson acknowledged last week that the administration has had little success getting lawmakers on board.

Some economists think the economy may already be in recession because the consumer spending crutch the US economy has relied upon for growth is being kicked away - a concern the soft retail sales data reinforced.

'This shows us the US consumer, who has been the stalwart holding up the US economy of late, is starting to buckle,' said Mr Firas Askari, head of foreign exchange trading for BMO Capital markets in Toronto.

Consumers are being doubly pinched by rising energy costs and falling home prices and there is no sign that pressure from either source will ease in 2008.

Holiday sales were weak
The National Retail Federation reported on Tuesday that its members said their 2007 holiday sales - which combine November and December sales - rose a weaker-than-forecast 3 per cent to US$469.9 billion. The federation had expected a 4 per cent increase but said the sales climate deteriorated at year-end. There were signs that bleaker sales prospects extended into 2008.

The International Council of Shopping Centres and UBS Securities LLC said sales last week slipped 0.9 per cent and were only up 1.1 per cent on a year-over-year basis.

Separately, the Labour Department said the producer price index, which measures prices received by farms, factories and refineries, dipped 0.1 per cent in December as fuel prices dropped. However, core prices, which strip out food and energy costs, edged up 0.2 per cent.

Energy prices declined by 1.9 per cent in December as gasoline costs fell 4.8 per cent. However, for the year as a whole, gasoline prices were up a whopping 37.1 per cent.

Retail sales for all of 2007 rose 4.2 per cent, a significantly softer gain than the 5.9 per cent increase in 2006 and the weakest advance since a 2.4 per cent rise in 2002.