Sales at U.S. retailers fell for a second straight month in June and businesses wary of ebbing demand barely raised inventories in May, more evidence the economic recovery has slowed in recent months.

Retail sales slipped 0.5 percent last month, pulled down by weak receipts at automotive dealers and gasoline stations, the Commerce Department said on Wednesday. The decline outstripped the 0.2 percent fall economists had expected and followed a 1.1 percent drop in May.

The data comes on the heels of an unexpectedly wider trade deficit in May and prompted economists to trim growth forecasts for the second quarter.

Activity at the end of the quarter was much weaker than at the start, said Paul Dales, a U.S. economist at Capital Economics in Toronto. It has therefore become much more likely that private sector demand will not be able to offset the fading fiscal stimulus.

The back-to-back declines in sales followed seven straight months of gains that had been helped by government incentives.

The retail sales was the latest in a series of weak data -- from home sales to factory activity to hiring -- that suggest the recovery from the most severe recession since the 1930s is softening a bit earlier than economists had expected.

With demand sluggish and inflation pressures muted, the Federal Reserve is seen holding benchmark interest rates near zero into next year, a Reuters survey on Wednesday showed.

Minutes of the U.S. central bank's June 22-23 minutes showed policy-makers felt they should be ready to consider additional steps to boost the economy should the outlook worsen. Fed officials trimmed their 2010 growth forecasts.

On Wall Street, the broader Standard & Poor's 500 index <.SPX> snapped a six-day winning streak as investors frowned at the weak sales report and the Fed's suggestions more measures might be needed to support the economy.

Prices for U.S. government debt rallied as investors sought safe havens, but the dollar fell against the yen and touched a two-month low versus the euro.

Despite the moderation in the recovery, some economists argued against fears the economy could slip back in recession.

We don't think the recovery itself is in jeopardy. The fundamentals are in place. We have been adding private jobs on a pretty consistent basis, said Scott Hoyt, a senior director of consumer economics at Moody's Economy.com in West Chester, Pennsylvania.

CONSUMER SPENDING LOSING STEAM

After strong gains in the first quarter, consumer spending is losing steam as households grapple with a 9.5 percent unemployment rate and sluggish income growth. In June, earnings slipped as employers trimmed working hours.

Slackening demand may already be making businesses wary of building inventories, an exercise that has been largely behind the economic recovery that started in the second half of 2009.

Business inventories barely rose in May as sales fell for the first time since March 2009.

The sluggish recovery and high unemployment have become a headache for President Barack Obama and his fellow Democrats on Capitol Hill, who face a struggle to maintain majorities in the House of Representatives and Senate in November elections.

Republicans charge that Obama's efforts to stimulate the economy have failed, while the White House argued on Wednesday that the $862 billion stimulus plan it backed had saved or created 3 millions jobs.

The U.S. Chamber of Commerce on Wednesday credited the administration with helping to stabilize the economy, but said it had also created an environment of regulatory uncertainty that was restraining business activity.

Last month, motor vehicle and parts purchases dropped 2.3 percent. Excluding autos, retail sales dipped 0.1 percent last month after dropping 1.2 percent in May.

Although the report showed weakness in some key categories, core retail sales, which exclude autos, gasoline and building materials, rose 0.2 percent after slipping 0.1 percent in May.

Core sales correspond most closely with the consumer spending component of the government's gross domestic product report. But given that core sales for April and May were revised down, analysts lowered their expectations for consumer spending growth in the second quarter.

Last month, receipts at gasoline stations fell 2 percent after dropping 2.5 percent in May on lower prices.

Declining energy costs handed import prices their biggest decline in June in nearly 1-1/2 years, a separate report from the Labor Department showed. The weak energy costs and general price declines have some economists worried the economy could be flirting with deflation.

Tying in with a recent decline in home construction, sales of building materials and garden equipment fell 1.0 percent last month, extending the prior month's 9 percent drop.

The housing market distress was also highlighted by a fall in demand for home purchase loans to a 13-year low last week. Refinancing demand also slid despite near record-low mortgage rates, the Mortgage Bankers Association said.

(Additional reporting by Doug Palmer; Editing by Chizu Nomiyama)

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