U.S. retail sales should rise 2.5 percent this year, signaling that store chains have made it through the worst of the downturn as improvements in the housing and job markets bolster shoppers' confidence, a trade group forecast on Tuesday.

The 2010 forecast from the National Retail Federation marks an expected improvement from a 2.5 percent drop in 2009 and a 1.3 percent increase in 2008. The data covers retail industry sales, excluding automobiles, gas stations, and restaurants.

This year's sales forecast, while calling for growth, is still a modest one. Excluding the past two years of recession, a 2.5 percent rise in retail industry sales would mark the lowest year-over-year increase since 1995, when the trade group began tracking such figures.

I wouldn't describe this as a very strong year, said NRF Chief Economist Rosalind Wells in an interview. We're not going to have a V-shaped recovery in the economy, and we won't have a V-shaped recovery in consumer spending or retail sales. It's a slow return to a more normal level.

U.S. retailers just completed a better-than-expected holiday sales season. Holiday retail sales rose 1.1 percent in 2009, according to the NRF, beating its own forecast for a 1 percent drop in sales for the November-December period.

Retail chains were able to improve upon a dismal 2008, when holiday sales fell 3.4 percent, by cutting inventories and offering more targeted discounts to attract frugal shoppers.

JOBS, HOUSING TO HELP RETAIL SALES

The question looming is whether retailers can keep that momentum going in 2010 as consumers remain under pressure.

For 2010, Wells expects consumers to keep a frugal mind-set with a focus on values. That should help sales at discount retailers, warehouse clubs and off-priced retailers like Wal-Mart Stores Inc , Costco Wholesale Corp and TJX Cos Inc .

The number of U.S. workers newly applying for unemployment benefits unexpectedly rose in the week ended January 16, while regional manufacturing slipped in January, hinting at some slowing in the pace of economic recovery.

In 2010, the retail environment will remain difficult, but the improved economy and easy comparisons will result in positive sales gains, the NRF stated in its Retail Sales Outlook report.

While the employment picture is far from pretty, the NRF said the size of the monthly job losses has diminished and employment may start to grow this year.

The hope is that as the year goes on, we'll see improvement in the job market. When that happens, we'll see a better consumer confidence level, we'll see higher incomes, and that will all contribute to making consumers feel better and loosening up the pocket book, Wells said.

The housing market also is showing signs of stabilization, she said.

We think the housing market has bottomed, Wells said, adding that a recovery in housing would help boost home values, consumer confidence and demand for home goods, like furniture or bedding, she said.

Wells also said there is already some improvement in sales among more upscale retailers.

The high-end retailers are seeing better business because their consumer is a little less worried about losing their jobs, she said.

But retailers facing the biggest challenges for 2010 are those catering to middle-income shoppers.

The difficulties are still in the middle-income market. That will continue to struggle, she said.

(Reporting by Nicole Maestri; Editing by Michele Gershberg and Carol Bishopric)

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