Growth in U.S. retail sales stalled in August after a spending battle in Congress crushed consumer sentiment, leaving the economy perched uncomfortably close to recession.

The weak data puts more pressure on the U.S. Federal Reserve to try to boost growth, while a report showing flat wholesale prices in August could support arguments within the central bank to take action.

The slowdown in the economy is real, said Steven Ricchiuto, chief economist at Mizuho Securities in New York. It's a broad-based slowdown, and that's pivotal.

Retail sales were unchanged last month from July, the Commerce Department said on Wednesday. The government also lowered previous estimates for growth during June and July.

The data was the latest hard evidence the United States is flirting with recession. Other reports have shown there was no employment growth in August, while claims for jobless benefits rose in early September.

Consumer confidence plunged last month after a battle over the deficit slammed stock prices and pushed the nation to the brink of default. The country's debt was then downgraded.

The consumer reacted to the debt ceiling (argument), the downgrade and the equity market swoon by basically hunkering down and not spending, said Tom Porcelli, senior U.S. economist at RBC Capital Markets in New York.

Citing the weak data, Nomura cut its forecast for third-quarter economic growth to 2.4 percent from 2.6 percent.

However, major U.S. stock indexes shook off the data and rose after the head of the European Commission said he would soon present options for the introduction of euro area bonds, which could help the region fight its debt crisis.


Consumer spending accounts for about two-thirds of U.S. economic activity, and the retail sales figures showed spending during the first two months of the third quarter was weaker than many forecasters expected.

An increase in sales of electronics, gasoline and food was balanced with drops in purchases of cars, furniture and clothes. Spending at restaurants and bars also dipped.

A gauge that hews most closely to the measure the government uses in calculating GDP rose just 0.1 percent.

A Reuters poll released on Wednesday found economists see a nearly one-in-three chance the United States could re-enter recession. Many economists expect the Fed will unveil new measures to boost growth next Tuesday following a two-day meeting.

U.S. households still feel the pain from the country's 2007-2009 recession. A report on Tuesday showed the U.S. poverty rate -- already the highest in the developed world -- rose last year to 15.1 percent, its highest level since 1993.

Companies are also feeling the pinch. Best Buy Co cut its profit outlook for the year on Tuesday, citing economic uncertainty.

Policymakers are struggling to counter the weakness.

President Barack Obama is lobbying Congress to approve his recently unveiled job stimulus program but opposition Republicans have harshly criticized parts of the plan.

Fed Chairman Ben Bernanke has hinted at further monetary stimulus, although three policymakers within the central bank last month dissented over a pledge to keep interest rates low into 2013.

A separate report on Wednesday from the Labor Department showed prices received by U.S. producers were unchanged in August, held down by a drop in energy costs. That could help keep inflation from being an immediate roadblock to further monetary stimulus.

Another report from the Commerce Department showed U.S. business inventories rose slightly less than expected in July, suggesting firms remained cautious about future demand.

Economic growth slowed sharply during the first half of the year, leaving the economy vulnerable to potential shocks like an escalation of Europe's debt crisis.

U.S. Treasury Secretary Timothy Geithner urged Europe to move more aggressively to solve its troubles, but said it has the financial and economic capacity to do so.

(Additional reporting by Mark Felsenthal in Washington and Richard Leong and Emily Flitter in New York; Editing by Andrea Ricci, Neil Stempleman and Dan Grebler)

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