RETAIL VENTURES, INC. 
By By Glenn Somerville
However, a sharp retreat in energy costs pulled wholesale prices down in August by the largest amount in almost two years and consumer sentiment hit an eight-month high this month as Americans breathed a sigh of relief as gasoline prices fell.
The Reuters/University of Michigan survey of consumer confidence jumped to 73.1 in September, its strongest since January, from 63 in August. That was well above analysts' expectations and likely reflected cheaper gasoline prices.
"Higher gas prices directly impact consumers' wallets, especially in a tough economic environment, so when gas prices eased over the past month, that boosted consumer confidence," said Ian Shepherdson, chief economist for High Frequency Economics in Valhalla, New York.
The mixed data helped push up prices for U.S. government debt as traders began to inch further toward the view that a Federal Reserve rate cut was possible by year end.
That did little to lift spirits among stock investors, however, who remained fixated on the possibility that investment bank Lehman Brothers
The retail sales report from the Commerce Department highlighted a weakening economic outlook as consumers, who fuel two-thirds of national economic activity, pull back after being battered by soaring energy costs, plunging home prices and an anemic jobs market.
"It looks like consumer spending is retrenching, not only retrenching but digging a new hole," said Chris Rupkey, senior financial economist for the Bank of Tokyo-Mitsubishi UFJ in New York. "I would be very surprised to see consumer spending in positive territory in the third quarter."
Retail sales dropped 0.3 percent in August after a sharply revised 0.5 percent drop in July, the department said. July's decline was previously reported as only 0.1 percent.
The August fall in sales was sharply contrary to forecasts by Wall Street analysts who had expected a 0.2 percent sales increase.
Separately, the Labor Department said August wholesale prices dipped by 0.9 percent, the sharpest retreat in almost two years, primarily because of a decline in energy costs.
That will be a relief for Federal Reserve policy-makers who meet on Tuesday to consider interest-rate strategy. The Fed is widely seen keeping official interest rates on hold but may again express its concern at the potential for inflation.
In futures markets, the chances for a Fed rate cut by year end rose after the retail sales report, but those gains were pared on the strong consumer confidence data.
Sales at motor vehicle dealers rose 1.9 percent in August -- the first increase since January -- after a 4.3 percent July drop. But August sales still were down 13.5 percent from a year earlier.
Excluding motor vehicles, retail sales in August were down 0.7 percent after gaining 0.3 percent in July.
Gasoline sales fell 2.5 percent last month -- the biggest monthly decline since mid-2007 -- after a 0.2 percent rise in July. Gasoline prices eased in August from record July levels.
Sales of building materials, clothing and electronics all were weaker in August than they were in July. Businesses have slashed jobs in every month so far this year, and many analysts expect hard-pressed consumers will cut their spending during the third quarter for the first time in 17 years.
Another report from the Commerce Department showed business inventories rose during July at the sharpest rate in four years, another sign that consumers are reluctant to spend.
Inventories jumped 1.1 percent to $1.51 trillion after growing by a revised 0.8 percent in June, with stocks of unsold goods rising in categories ranging from new cars to clothing, food and furniture.
(Additional reporting by Mark Felsenthal; Editing by Neil Stempleman)
