"This is a terrible December statistic. This is really bad, and it's the weakest year for retail sales since 2002. It's very bad news for the economy," Wang said. "It offers clear evidence that the consumer is pulling back, and the Fed needs to recognize this fact."

Meanwhile, the November 2007 retail sales statistic was revised lower, to a 1% increase, the Commerce Department said.

'Clear and present danger' signal

Wang said that although the monthly retail sales statistic is subject to revision, a poor or below-average statistic for December -- which includes sales for the critical holiday shopping period -- invariably points to tougher times ahead for the U.S. economy. In this case, when combined with other negative data points, it suggests the U.S. economy has stalled.

"The December retail sales statistic is a 'clear and present danger' signal for the Fed. When you add the negative impact of the subprime housing issue and high oil prices, there's little doubt now that we've entered a recession, with negative GDP growth for Q2," Wang said.

Wang said the Fed should "cut interest rates more assertively." Previously, Wang advocated a "50 and 50" basis point rate cut by April or May 2008. Now, he thinks the Fed should cut rates by 125 basis points, and with all rate cuts in Q1.

"I would cut rates by 75 basis points and then again by 50 basis points over the next two meetings," Wang said. "If the Fed drags the cuts out until Q2, it may be too late to prevent real damage being done to the economy. The data clearly shows that the U.S. economy needs the stimulus as soon as possible."

Economist Steve Affinito agreed with Wang's assessment.

"The December data clearly shows that the consumer has pulled back a lot. Inflation remains a concern for the Fed because of high commodity prices, but recession is the mounting concern now, so larger rate cuts are needed," Affinito said. "But as I said earlier, fiscal stimulus will also be needed to fend off the effects of the recession, so it's important that Congress and the president pass a fiscal stimulus package."

President Bush and congressional officials are each outlining stimulus packages, with varying components. At this juncture, bipartisan support appears to exist for a $300-$500 tax rebate, as debate continues on additional fiscal stimulus components.