WASHINGTON -- Retail sales registered a larger-than-expected gain in February on top of a January increase that was revised higher, the government reported yesterday. U.S. stocks plunged on the news, sending the Dow Jones industrial average down 160.48 points.
The Commerce Department report suggested that American consumers are spending the economy into a growth spurt.
Labor markets also showed strength as first-time unemployment claims fell last week.
"Suddenly, the economy seems to have gone into overdrive," said Robert Dederick, an economic consultant at the Northern Trust Co. in Chicago. "These are big gains."
Bonds also plummeted on fears the economy's strength could re-ignite inflation and push Federal Reserve policy makers to raise the overnight bank lending rate as early as their March 25 meeting in a pre-emptive strike to cool the economy.
First-quarter growth could top 4 percent, Dederick said.
"The economy's growing at a healthy clip," Fed Vice Chairman Alice Rivlin said yesterday, reminding a Washington audience that the Fed remains on guard against price pressures.
Retail sales rose 0.8 percent last month after increasing a revised 1.5 percent in January, the largest monthly gain since February 1996, Commerce Department figures showed.
Catalog retailer Lands' End Inc. of Dodgeville, Wis., offered evidence yesterday about the strength of consumer spending, reporting its sales rose 6 percent in the quarter ended Jan. 31 even though company executives said they lost some sales because they didn't have enough inventory to meet Christmas demand.
* The Labor Department said the four-week average for first-time unemployment claims declined to 310,250, the lowest level in almost eight years. That's a sign of the level of job growth that Fed Chairman Alan Greenspan warned in recent testimony to Congress could speed inflation -- and has the Fed prepared for battle.
"It appears the Fed is more likely to raise rates, and who knows if they'll do it once, twice or three times," said John Snyder, chief investment officer of Sovereign Asset Management, which oversees about $2.5 billion. The Fed has held the overnight bank rate at 5.25 percent since January 1996.
* The Commerce Department said the U.S. trade deficit in goods, services and investments widened to $165.095 billion in 1996, the largest shortfall in almost a decade. Net foreign holdings of Treasury securities posted a record as international investors hunted for higher returns in what is the strongest major economy in the world today. The current account balance is the broadest measure of international trade. In 1995, it registered a deficit of $148.154 billion.
The Dow average fell 160.48, or 2.28 percent, to 6,878.89, its biggest percentage drop in eight months, after setting record highs Monday and Tuesday. In 1994, when the Fed raised interest rates six times, the Dow rose just 2.14 percent.
Philip Morris Cos. worsened the Dow's decline. Its shares plunged $10.76 to $126 after a Mississippi Supreme Court said a state lawsuit against tobacco companies can proceed to trial in June. The setback trimmed $8.7 billion from the company's market value.
The yield on the benchmark 30-year Treasury bond rose 7 basis points to 6.95 percent -- the highest level since September.
The Standard & Poor's 500 index slipped 14.70, or 1.83 percent, to 789.56, led by a retreat in bank shares. NationsBank Corp. fell $3 to $59.75; Citicorp fell $5.50 to $117.25; and Chase Manhattan Corp. lost $5 to $98.875.
The Nasdaq composite index fell 10.85, or 0.83 percent, to 1,293.28, performing relatively better than its rivals as software issues rose in anticipation of Oracle Corp.'s release of third-quarter earnings.
After the market closed, the database software company reported profit from operations of 29 cents a share, meeting analysts' expectations. Oracle shares closed up $2 at $36.125, then climbed to $38 in after-market trading.
Yesterday's most active stocks in U.S. trading were Oracle, Cisco Systems, Employee Solutions Inc., Intel and Wal-Mart.
Among broad U.S. stock indexes, the Russell 2,000 index of small capitalization stocks tumbled 4.34 to 360.06; the Wilshire 5,000 index, comprising stocks on the New York, American and Nasdaq stock exchanges, plunged 122.17 to 7,553.13; the American Stock Exchange composite index dropped 4.02 to 598.02; and the S&P 400 midcap index slid 2.88 to 263.14.
It was the broadest decline since Dec. 11, as 1,567 more stocks dropped than gained on the New York Stock Exchange.
Some investors said the market's setback might be temporary, because today's release of the Labor Department's producer price index will probably show that inflation is still tame.
"I suspect we'll get a mild PPI number which would make yesterday's drop an overreaction," said Michael Fields, a money manager at AMR Investments, an AMR Corp. unit which oversees $15 billion. "We could be in for a roller coaster ride."