The report led some economists to downgrade their estimates for economic growth in the April-June quarter. Many now think the economy grew even less than in the first quarter of the year, when it expanded at a sluggish 1.9 per cent annual rate.
Spending in June fell in nearly every major category — from autos, furniture and appliances to building, garden supplies and department stores. Overall, retail sales slid 0.5 per cent from May to June, the Commerce Department said.
Retail sales hadn't fallen for three straight months since the fall of 2008, at the height of the financial crisis.
The weak U.S. spending figures were announced on the same day that the International Monetary Fund slightly lowered its outlook for global growth over the next two years.
Stocks fell after the Commerce report was released. The Dow Jones industrial average sank 74 points in early trading. Broader indexes also declined. Later in the morning, stocks regained some of their losses.
"However hard you look, there's just no good news in this report at all," said Paul Ashworth, chief U.S. economist at Capital Economics.
Weakening retail spending could make the Federal Reserve more likely to take further steps to try to lower long-term interest rates to encourage more borrowing and spending. The Fed's policy committee will meet at the end of this month.
Most economists don't expect the Fed to announce new action after that meeting. But some said Monday's Commerce report, coming after three straight months of tepid hiring, makes Fed action more likely before year's end.
Retail sales were still 4.7 per cent higher in the April-June period than in the second quarter of 2011. And retail sales don't include spending on services, which represents a larger portion of the economy.
Still, Ashworth said overall economic growth likely slowed to an annual rate of just 1.5 per cent in the second quarter. That's isn't enough to lower high unemployment. The U.S. unemployment rate is 8.2 per cent.
In Monday's report, the Commerce Department also said Americans spent less in April than previously thought. In part because of that, Michael Feroli, an economist at JPMorgan Chase, lowered his estimate of growth in the April-June quarter from a 1.7 per cent annual rate to a 1.4 per cent rate.
Chris G. Christopher Jr., senior economist at IHS Global Insight, said IHS thinks the economy grew at an annual rate of just 1.3 per cent in the April-June quarter. And it isn't expecting much of a pickup in the second half of 2012: The annual growth rate will likely stay below 2 per cent in both the third and fourth quarters, he said.
Christopher said the biggest problem is meagre job growth. Consumers have also been rattled by gyrating stock prices stemming from Europe's debt crisis.
"Consumers are getting hit from all sides at the moment," Christopher said, despite the benefit of sharply lower gas prices since April.
Lewis Tipograph, owner of Kids' Closet, a mid-priced children's clothing store in Washington, D.C. said his business has suffered since April. Customers are growing uneasy, he said.
"Earlier in the year, people were feeling more optimistic," Tipograph said. "There was a convergence of a lot of good things. But now, people are feeling nervous."
Some of the sting of Monday's retail sales report was eased by a separate Commerce report that U.S. companies added to their stockpiles in May. When businesses step up restocking, they tend to order more goods, leading to more factory production and economic growth.
The decline in retail sales reflects, in part, falling gas prices. But even excluding sales at gas stations, retail spending fell 0.3 per cent from May to June.
As hiring has slumped, pay has barely kept pace with inflation. As a result, consumers have pulled back on their spending, which drives 70 per cent of economic activity.
"Recent weak jobs data have certainly done nothing to alter our view that consumer spending growth will be very modest at best in the quarters ahead," said Joshua Shapiro, chief U.S. economist at MFR Inc. "A silver lining in the economic clouds is that lower gasoline prices are helping to cushion the consumer."
The IMF lowered its outlook for global growth over the next two years in part because of Europe's financial crisis and slower expansion in China and India.
The international lending organization predicts global growth of 3.5 per cent this year, down from its forecast of 3.6 per cent in April. It cut its forecast for 2013 to 3.9 per cent growth, from 4.1 per cent three months ago.
The IMF also shaved its forecast for U.S. growth to 2 per cent this year and 2.3 per cent next year, both slightly below its previous estimates.
Still, factory activity in the New York region is growing at a slightly faster pace , according to a survey issued Monday. The Federal Reserve Bank of New York said its Empire State manufacturing index increased to 7.4 in July from a reading of 2.3 in June. Any number above zero indicates growth.
The retail spending report showed that sales at auto dealers — one of the economy's strongest areas this year — fell 0.6 per cent from May to June. That's a gloomier assessment of the industry than earlier reports from automakers had suggested.
The automakers said sales rose 22 per cent in June from the same month in 2011. But the automakers don't adjust their sales data for seasonal changes. And their figures reflect changes from the same month in the previous year, not from month to month.
The weakness in June extended well beyond auto sales. The Commerce report showed sales fell 0.7 per cent at department stores and 1.6 per cent at building supply stores. Sales at furniture stores and electronics and appliance stores both fell 0.8 per cent.
Sales at gas stations dropped 1.8 per cent after a 2 per cent drop in May. The declines reflected cheaper gas, which has dropped more than 50 cents since early April.
The economy is expanding too slowly to lower the unemployment rate. Employers have created an average of just 75,000 jobs a month in the April-June quarter — only about a third of the monthly job growth during the previous three months.
AP Business Writer Anne D'Innocenzio in New York contributed to this report.