July 14 (Bloomberg) -- U.S. retail sales fell 1.1 percent in June, the biggest drop since February of last year, underscoring forecasts for slower consumer spending in the second quarter.

Last month's decline, which reflected a drop in spending at automobile dealerships and department stores, followed a revised 1.4 percent increase in May, the Commerce Department said in Washington. Economists had forecast a 0.8 percent drop. Excluding vehicles and parts, sales fell 0.2 percent after rising 0.9 percent a month earlier.

Gasoline prices, which held above $2 a gallon on average in May and June, limited sales at Wal-Mart Stores Inc. at the same time autos sold at the slowest annual rate in six years. Job growth, and the income gains that come with it, are needed to boost spending, which accounts for two-thirds of the economy, economists said.

``June will prove to be a temporary setback,'' said Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut, before the report. ``Accelerating income growth generated by solid payroll gains have given households ample funds to support robust spending.''

Economists had expected retail sales to drop after May's previously reported 1.2 percent rise, based on the median forecast of 72 estimates in a Bloomberg News survey. Sales excluding automobiles were forecast to rise 0.2 percent.

Consumer spending is forecast to slow to a 3.2 percent annual rate in the second quarter from a 3.8 percent pace in the prior three months, based on the median estimate in a separate Bloomberg poll from June 26 to July 6. Third-quarter spending may rise at a 3.5 percent rate, the survey found, as hiring and incomes rebound.

Pier 1

``There's been a lot of discussion that the boom is over,'' Cary Turner, chief financial officer at Pier 1 Imports Inc., said yesterday at a conference in Boston. ``But we feel there is still a trend that people want to buy for the home and that people want to own a home.'' Turner said the largest U.S. retailer of imported home furnishings and accessories plans to open more stores because demand is increasing.

Sales at automobile dealerships and parts store dropped 4.3 percent last month, the biggest decline since February 2003, after rising 3.2 percent. Purchases slowed to a 15.4 million annual rate in June from 17.8 million in May, according to industry figures earlier this month. That was the slowest rate since August 1998, as incentives at General Motors Corp. and Ford Motor Co. lured fewer buyers.

Receipts at service stations dropped 0.9 percent last month, the biggest decrease since October 2003, following a rise of 5 percent in May.

Department Stores

Sales at general merchandise stores, which include department stores, fell 0.2 percent last month after rising 1.1 percent in May. Department stores sold 0.8 percent less merchandise last month. Sales at clothing and accessory stores declined 0.5 percent after rising 1.4 percent.

Rainy weather across much of the country may have helped restrain sales. The National Climatic Data Center in Asheville, North Carolina, said 3.53 inches fell last month, the seventh- wettest June on record and 0.63 inches more than the 1895-2004 average.

Sales at electronics and appliance stores rose 0.5 percent, while furniture sales increased 1.1 percent, the Commerce report showed.

Purchases at sporting goods, hobby, book and music outlets rose 0.6 percent while sales at food and beverage stores fell 0.1 percent. Sales at restaurants and drinking places declined 0.8 percent after rising 0.3 percent a month earlier.

Building Materials

Sales at building material and garden supply stores rose 0.1 percent last month following a 0.9 percent drop in May.

Excluding cars and gasoline, sales declined 0.1 percent last month following a rise of 0.4 percent.

Purchases excluding autos and building materials, the category used in the Commerce Department's calculation of personal consumption in its report on gross domestic product, fell 0.2 percent following rising 1.1 percent in May.

Retailers including Bentonville, Arkansas-based Wal-Mart and J.C. Penney Co., based in Dallas, said gasoline prices that rose by a third from a year earlier left consumers with less to spend in June on clothes and other items.

The average retail price of gasoline held above $2 a gallon for a second straight month in June, according to Department of Energy figures. The average retail price of all grades of gasoline rose to a record $2.10 a gallon on May 24.

Second Quarter

Higher energy prices prompted economists to reduce estimates for growth in the second quarter to an annual rate of 4.1 percent, down from a previous forecast of 4.5 percent, according to the median estimate in the latest monthly survey by Bloomberg News. Economists surveyed expect growth of 4.5 percent this year, the fastest since 1999.

Oakley Inc., a maker of sunglasses, cut its earnings forecast for 2004 and said second-quarter sales will be less than analysts had expected after customer demand for its products waned.

Job gains will average more than 200,000 a month in the third quarter, helped by increased demand as companies step up production to rebuild depleted inventories, said Lynn Reaser, chief economist at Banc of America Capital Management in St. Louis. Payrolls increased by 112,000 in June, the latest Labor Department figures show.

Target Corp., the second-largest U.S. discount chain, said July sales are rising more than the 1 percent to 2 percent gain it has forecast. The Minneapolis-based retailer attributed the rise to purchases for the July Fourth holiday and demand for garden equipment, entertainment, toys and automotive items.

Fort Worth, Texas-based Pier 1, which has about 1,000 stores in North America, the U.K. and Mexico, expects to boost this number to 1,500 stores within the next few years, Turner said. The company's June sales at stores open at least a year fell 4.3 percent, less than the company's forecast of a 7 percent to 9 percent decrease.

To contact the reporters on this story: Joe Richter in Washington jrichter1@bloomberg.net

Last Updated: July 14, 2004 08:30 EDT