Business Inventories Rose Sharply In May

Also, retail sales showed unexpected decline in June.

The Commerce Department reported Friday that inventories held by U.S. businesses on shelves and back lots rose by 0.8 percent in May, following a 0.7 percent increase in April. Inventory increases during a period when the economy is slowing and could be a warning sign that factory production will be reduced in future months to get inventories more in line with sales.

Meanwhile, consumers continued to curtail their spending last month as rising gasoline prices dampened purchases of other goods, a fresh indication of a cooling economy. The cutback unexpectedly pushed retail sales into negative territory in June, when they dipped 0.1 percent after edging up by the same amount in May, Commerce said.

Excluding gasoline sales, June retail sales fell 0.2 percent.

The latest figure was another indication that gasoline prices ''are beginning to bite and are beginning to squeeze consumers pretty hard,'' said Nariman Behravesh, an economist with Global Insight in Lexington, Mass.

The decline surprised economists, who had predicted an increase of 0.4 percent for retail sales in June.

Still, the $363.8 billion estimated to have been rung up in June marked a 5.9 percent increase from the same month in 2005.

Economic unease has deepened since June. In recent days, surging oil prices and interest rate jitters have soured Wall Street's mood,and stocks plummeted for a second straight session on Thursday, with the Dow Jones industrial average dropping almost 167 points for a two-day loss of 288.

Escalating violence in the Middle East, with Israel widening its offensive in Lebanon on Friday, carried oil to a new high of more than $78 a barrel in European markets amid concerns over possible supply disruptions.

The spike in oil prices and the weak retail sales report helped pull stocks lower for a third straight day on early Friday.

Analysts say that U.S. consumers, who have been the driving force in the four-year-old economic expansion, are beginning to flag in their shopping zeal under an array of adverse forces such as rising interest rates, a cooling housing market and slowing growth in employment.

Consumer spending, which accounts for two-thirds of total economic activity, helped power the economy to growth of 5.3 percent in the first three months of the year. Analysts believe that economic growth will slow to around 3 percent in the current quarter, reflecting a weaker consumer sector.

The 0.1 percent decline in June was fueled by a 1.4 percent drop in auto sales, an area of continued weakness.

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