US retail sales fell for a second straight month in May and wholesale prices dropped by the most in three years, offering more evidence of a downshift in the economic recovery.

Retail sales slipped 0.2 percent as demand for building materials sagged and declining gasoline prices weighed on receipts at service stations, a Commerce Department report showed on Wednesday. April's sales were revised to show a 0.2 percent drop instead of the previously reported 0.1 percent gain.

Motor vehicle sales rose 0.8 percent, a surprise given that manufacturers reported weak unit sales during the month. Excluding autos, sales fell 0.4 percent, the biggest decline in two years, after dropping 0.3 percent the prior month.

“There is clearly some slowing in the pace of consumer spending broadly suggesting noticeably slower growth in consumption in the second quarter,” said Julia Coronado, chief economist for North America at BNP Paribas in New York.

Separately, the Labor Department said its producer price index dropped 1.0 percent last month as energy costs slumped 4.3 percent.

US stock index futures extended their earlier losses, while Treasury debt prices pared losses. The dollar erased gains versus the yen and slightly extended losses versus the euro.

While weak receipts at suppliers of building materials and service stations accounted for the bulk of the fall in sales last month, details of the report were mixed and added to signs of cooling demand.

Job growth has slowed in the past three months, with employers adding the fewest jobs in a year in May.

A combination of the worsening debt crisis in Europe and a looming so-called fiscal cliff at home are creating uncertainty that is souring both business and consumer confidence.

Economists have lowered their second-quarter growth estimates to below 2 percent. Gross domestic product forecasts previously ranged between an annual rate of 2 and 2.5 percent.

A Reuters poll published on Wednesday showed economists over the past month had trimmed their expectations for hiring.

Economists now expect the economy to gain only 147,000 jobs a month, on average, between now and October - a pace likely too slow to do much to lower the nation's 8.2 percent unemployment rate ahead of the presidential election.

Retail sales last month were dragged down by a 2.2 percent drop in sales at gasoline stations after a decline of 1.4 percent in April.

Gasoline prices dropped 17 cents last month to $3.79 a gallon. Excluding gasoline, retail sales nudged up 0.1 percent after easing 0.1 percent in April.

But declining gasoline prices offer a silver lining in an otherwise darkening economic outlook. Apart from freeing households' discretionary income, weak gasoline should also help to keep inflation pressures contained and provide the Federal Reserve with some scope to aid the sputtering recovery.

The US central bank meets on Tuesday and Wednesday of next week. A Reuters poll of economists last week put just over a 40 percent chance of the Fed extending its “Operation Twist” program aimed at pushing long-term interest rates lower.

“Inevitably, the easing inflation pressures will provide considerable room for monetary accommodation by the Fed, and if this disinflationary trend becomes entrenched, it may actually provide some justification for aggressive monetary policy action,” said Millan Mulraine, senior macro strategist at TD Securities in New York.

Sales at building materials and garden equipment suppliers dropped 1.7 percent. So-called core retail sales, which exclude autos, gasoline and building materials, ticked up 0.1 percent after a similar gain in April.

Core sales correspond most closely with the consumer spending component of the government's GDP report.

Sales at restaurants and bars fell 0.2 percent, while receipts at sporting goods, hobby, book and music stores dipped 0.1 percent.

But there were bright spots in the report, with sales of electronics and appliances rising 0.8 percent and clothing store receipts advancing 0.9 percent. Sales at furniture stores rose 0.4 percent.

A third report showed applications for US home mortgages, which includes demand for new loans and refinancings, rose 18 percent in the week ended June 8 to reach the highest level since 2009, the latest sign of a strong spring selling season. - Reuters