Weak retail sales and bank fears send shares tumbling

The annual back-to-school spending splurgedid not happen in the US this year, raising new fears that consumers in the world's largest economy may lead the world into recession.

A slew of weak retail sales and other economic data, together with renewed concerns over the health of the banking sector, sent stock markets sharply lower. The Dow Jones average ended down 345 points – 3 per cent – at 11,188.2; in the UK, the FTSE 100 ended 2.5 per cent lower at 5,362.1.

The largest US retailer, Wal-Mart, was the one bright spot in a miserable set of August sales reports from the country's store chains. Its success was based on offering cheap deals, which lured cash-strapped consumers away from department stores and shopping centres. A Thomson Reuters analysis of the reports calculated that the average sales gain was 1.6 per cent, compared with 3.1 per cent last year.

Teen-focused chains were among those badly hit, with Abercrombie & Fitch missing expectations with an 11 per cent sales decline. The high-end fashion store Saks also missed forecasts. Gap posted an 8 per cent fall in sales. The discount chain Target said August sales were down 2.1 per cent and predicted a flat September.

The back-to-school selling season, which runs from July to September, is the industry's second most important, after Christmas. The International Council of Shopping Centres said it could be the worst back-to-school season for seven years. "Consumers are very focused on value, stretching their dollars," said Ken Perkins, president of Retail Metrics, the consulting firm. "Anything deemed not absolutely of need, they are forgoing those purchases."

Economic data out yesterday revealed some of the pressures that contributed to the weak retail environment. Productivity figures showed that US employers spent 0.5 per cent less on labour in the second quarter of the year, by keeping wages low and cutting employees' hours. The number of new unemployment claims last week was a worse-than-feared 444,000.

Banking shares led the stock market fall in the US. Investors feared that companies will find it harder to replace billions of dollars in losses from mortgage derivatives, and a leading fund manager, Bill Gross, at Pimco, said institutional buyers have no more appetite for the debt or preferred equity of financial companies.