March 13 (Bloomberg) -- Retail sales in the U.S. unexpectedly fell in February, indicating that declines in payrolls and home values and a surge in energy costs have pushed the economy into a recession.

Sales dropped 0.6 percent, led by auto dealers and restaurants, after a 0.4 percent gain in January, the Commerce Department said. Meanwhile, the Labor Department said jobless benefits rolls climbed to a 2 1/2-year high, and import prices soared 13.6 percent from a year ago, reflecting higher energy costs.

``No wonder the consumer stopped spending,'' said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. ``Confidence is at recession-type lows.''

Traders increased bets on a three-quarter percentage-point interest-rate cut by the Federal Reserve when officials meet on March 18. After a 15 percent jump in oil prices and an 85,000 drop in U.S. payrolls so far this year, economists project the weakest pace of consumer spending since 1991 this quarter.

Labor figures showed jobless rolls rose to 2.835 million in the week ended March 1, the highest since September 2005. First- time claims for unemployment benefits were unchanged at 353,000 last week.

Retail sales excluding autos declined 0.2 percent after a 0.5 percent gain, the Commerce Department said.

Stocks Drop

The Standard & Poor's 500 stock index was up 0.4 percent to 1,313.9 at 1:33 p.m. in New York, led by gains in energy and commodity producers as raw-material prices rose. Odds of a Fed rate cut to 2.25 percent, from 3 percent, climbed to over 90 percent today from 72 percent yesterday, futures prices show.

``This is yet another step into what's almost certainly a recession,'' said Gregory Miller, chief economist at SunTrust Banks Inc. in Atlanta, who had forecast a 0.2 percent drop in total purchases. ``The Fed has a very difficult job ahead.''

A Bloomberg News survey of 79 economists had forecast total retail sales would rise 0.2 percent, following an originally reported 0.3 percent gain the prior month. Sales excluding autos were also forecast to rise 0.2 percent.

Today's report showed sales at automobile dealerships and parts stores fell 1.9 percent, the most since June.

Sales at General Motors Corp., Ford Motor Co. and Toyota Motor Corp., the three biggest auto retailers in the U.S., fell in February from a year earlier, according to industry data issued March 3. General Motors and Ford each announced deeper reductions in production for the second quarter.

Housing Slump

The government's retail sales report also showed how the housing slump is filtering through the economy. Purchases of furniture, electronics and building materials all dropped.

The rising price of gasoline, which yesterday reached a record $3.27 a gallon for unleaded regular, is prompting Americans to cut back. Purchases at restaurants and bars fell 0.4 percent in February, the most since January 2007.

Consumers are even spending less on gasoline. Receipts at filling stations fell 1 percent last month, the most since August.

Excluding autos, gasoline and building materials, the retail group the government uses to calculate gross domestic product, sales were unchanged after a 0.3 percent increase the prior month. The government uses data from other sources to calculate the contribution from the three categories excluded.

Men's Wearhouse Inc., the Houston-based chain of 1,273 men's clothing stores, yesterday forecast an annual profit that trailed the estimates of some analysts. Sales in the fourth quarter fell 3.9 percent from the same time last year.

`More Cautious'

Wealthy consumers have become ``more cautious,'' Burt Tansky, chief executive at Dallas-based retailer Neiman Marcus Group Inc. said on a conference call last week. Less-affluent shoppers have ``pulled back somewhat in response to concerns about the U.S. economy and stock and housing markets.''

Consumer spending may grow at a 0.5 percent pace in the first quarter, the slowest pace since the 1991 recession, according to the median estimate in a monthly Bloomberg survey.

The odds the economy would slide into a recession this year were even, according to the median estimate in a Bloomberg News survey this month, the same as in the February poll. The economy lost 63,000 jobs in February, the most since 2003, the government said this month.

Rising fuel costs and fewer jobs couldn't come at a worse time for Americans, who are also facing declining property and stock prices. The losses leave Americans feeling less wealthy and even less likely to spend.

`Recession'

``Households are reacting to the loss in wealth by cutting back on spending, and lenders are reacting to the loss in their investments by cutting back on credit,'' said Kevin Logan, a senior market economist at Dresdner Kleinwort in New York. ``Falling home prices are taking the economy into a recession.''

A poll of Americans indicates other government efforts to revive the economy may not work.

The Congress and the administration passed a $168 billion stimulus package last month. Still, a Bloomberg/Los Angeles Times survey taken from Feb. 21 to Feb. 25 showed most Americans plan to save rather than spend the plan's tax rebates, indicating it may give less of a boost than intended.

To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net

Last Updated: March 13, 2008 13:36 EDT