NEW YORK — The latest reports from the nation's merchants indicate that higher energy and food bills and slumping home values are pressuring shoppers so much, they're turning to nibbling at the edges — buying single pillows rather than whole sets and opting for new paint instead of renovating.

With the consumer spending environment expected to remain rough for the rest of the year, major retailers are cutting back further on inventory, increasing discounting and focusing on their best customers. But the weakening climate could also spell more store closings and layoffs, as the industry looks ahead to a second half of 2008 that could be worse than the first half.

"Things are not getting any better," said Dan Ansell, a partner at Greenberg Traurig LLP and chairman of its real estate operations division. "It's the same theme of strongest will survive, and the weakest will not, or at least will have to adapt."

Earlier this month, bedding and home furnishings retailer Linens 'n Things filed for Chapter 11 bankruptcy and said it will close 120 underperforming stores. Others that filed for bankruptcy reorganization this year include gadget seller Sharper Image Corp., which is selling all its assets to an investment group at auction; gift catalog and online retailer Lillian Vernon Corp., which is being acquired by Current USA Inc.; and Wickes Furniture Co., a Wheeling, Ill.-based company owned by private investment firm Sun Capital Partners Inc.

Plenty of other retailers, including jewelry seller Zale's Corp., AnnTaylor Stores Corp. and Talbots Inc., have been shuttering units.

"Everyone is facing a new reality," Ansell said.

That reality looks to become even more dire — Burt P. Flickinger III, managing director of retail consultants Strategic Resource Group, expects that more than 10,000 stores across the food, drug and apparel categories, about 5 percent to 10 percent of the total retail industry's sales volume, will shutter before 2010.

Shoppers are confronting a new reality too: gas at the pump that's hitting more than $4 in many parts of the country, home values that keep getting lower and tightening credit lines. That's dampening hopes among retailers that shoppers will be using their stimulus checks for anything but debt reduction and food.

In fact, several large retailers, including Lowe's Cos. and J.C. Penney Co., told investors during their conference calls this month that they were unsure how much the stimulus checks would help lift their business amid such rising financial pressures.

Of more immediate concern to analysts, though, is the unrestrained rise in the price of gasoline. Gas now costs more than an average of $3.80 nationally — peaking well north of $4 a gallon in major coastal cities — and is expected to keep following oil higher.

Ken Hicks, president and chief merchandising officer at Penney, told investors that the benefits from the stimulus checks will be "modest and short-lived."

Given so much economic uncertainty, many retailers are trying to ride out the economic storm by focusing on cost-cutting and sharpening their prices.

Wal-Mart Stores Inc. has stepped up its discounting but it is also further adjusting its merchandising mix timed to when consumers get their government paychecks, including Social Security and public assistance.

The retailer is offering more smaller items such as rice and condiments in the days before the paycheck arrives. After payday, the discounter stocks up on bulk items as consumers have enough money to spring for bigger sizes that can last longer.

Target's president and chief executive, Gregg Steinhafel, told investors that the discounter is stressing sale prices more in its advertising, especially the 50 million newspaper circulars it puts out. He added that shoppers are focusing on buying necessities.

"We are just very mindful that the consumer is very cash-strapped right now and is looking for good values," Steinhafel said.