The latest state Tax Department figures show retail spending shrank to $8.39 billion during the January-to-June period, from $8.97 billion during the same six months last year.

But the figures also show that spending began to improve significantly in the second quarter ­ a sign that economists said supports the general trend of Hawai'i's gradually recovering economy.

The figures are one of the first looks at how hard one of Hawai'i's most important industries has been hit in the wake of the Sept. 11 terrorist attacks.

The $18 billion annual industry representing a little more than 10 percent of the gross state product, has been one of the slower growing sectors of the local economy from both tax and employment perspectives.

The 6.5 percent drop was a significant contributor to tax revenue collections that dropped $109 million for the state's fiscal year that ended in June.

For the first three months, sales declined by $578 million. But from April to June, sales were up $4 million.

"Definitely we should see some improvements in the second part of the year," said Pearl Imada Iboshi, the state's chief economist.

Still, state Labor Department figures show that retail jobs have hovered around 112,000 for the first half of the year, compared to about 116,000 during the same period a year ago.

"It still is not really back to where it was pre-9/11," Iboshi said.

Paul Brewbaker, chief economist at Bank of Hawai'i, said retail spending is going to recover more slowly because it is heavily influenced by purchases made by visitors.

"The visitor counts did not recover from 9/11 until mid-summer," he said.

Mike Hamasu, research and consulting director for Hawai'i commercial real estate firm Colliers Monroe Friedlander, said optimistic retailers leased 65,000 square feet of additional space on O'ahu during the first six months of the year, dropping the retail vacancy rate from 6.33 percent last year to 5.30 percent at the end of June.

In Waikiki however, the vacancy rate is 15.14 percent with 60,000 square feet of retail space available.

"It is a tale of two retail economies," Hamasu said. "The retail spending and job counts ­ these are all negative indicators, but there are retailers doing very well now."

The Federal Reserve's interest rate cuts have helped spur consumer spending on new homes and new automobiles, which are included in the retail spending figures.

Hamasu also said purchases of furniture and other home-improvement merchandise have been strong, and are helping offset retail sales that are pulled down by apparel and luxury merchandise favored by Japanese visitors.