Originally created 03/14/97

Inflation fears spark selloff



WASHINGTON - American consumers spent freely last month, though burdened by debt, increasing the chances the Federal Reserve will push interest rates higher to forestall inflation.

The Commerce Department's report on retail sales, and speculation on how it would be viewed by the central bank, propelled a sharp selloff in financial markets. The Dow Jones average of 30 industrial stocks dropped 160 points, the fourth steepest point drop on record.

Also, the Clinton administration, which found much appeal in the idea of letting a commission do the dirty work of slashing cost-of-living benefits for 60 million Americans, is backing away. Organized labor and senior citizens put up intense opposition.

However, supporters insisted Thursday that reducing the Consumer Price Index to produce billions of dollars in budget savings is not dead even though President Clinton has abandoned the use of a commission to pick the precise adjustment figure.

It was one of a grab bag of reports generally depicting a robust economy maintaining its momentum into the spring. The exceptions included one that showed the U.S. trade deficit soaring to its second-worst performance ever last year.

"The first half is going to be strong, led by consumer spending," said economist Mark Zandi of Regional Financial Associates of West Chester, Pa. "If trade wasn't a constraint, this economy would be booming, and we'd already be seeing higher interest rates."

As it is, Mr. Zandi said, Federal Reserve policy-makers probably will increase benchmark short-term interest rates by a quarter of a percentage point at their upcoming meeting on March 25 and another quarter point on May 20.

Fear of a monetary tightening sent long-term interest rates in the bond market shooting to the highest level in nearly six months. That triggered the stock selloff. The Dow average fell 160.48 to close at 6,878.89.

Retail sales rose a strong 0.8 percent to a seasonally adjusted $213.2 billion in February after shooting up 1.5 percent in January, the Commerce Department said.

The two-month combination puts first-quarter consumer spending on track to better the pace of the fourth quarter, when the economy grew at a robust 3.9 percent annual rate, said economist Bruce Steinberg of Merrill Lynch in New York.

"Consumers are on a spree," he said.}

Both department stores and auto dealers reported strong gains.

Consumer confidence is high, analysts said, because of a vibrant job market.

The Labor Department said new claims for unemployment benefits fell by 5,000 last week to 307,000, the lowest level in more than two years. The four-week moving average of claims, at 310,250, was the lowest since 1989.

Ironically, America's vigor, relative to its European trading partners and Japan, contributed to a sharp deterioration last year in the nation's current-account deficit, the broadest measure of U.S. foreign trade. Consumer demand in the United States fueled import growth while lackluster demand overseas restrained exports.

The current-account deficit jumped 11.4 percent to $165.1 billion, just short of the all-time record of $167.4 billion set in 1987, the Commerce Department said. It includes investment flows and foreign aid, in addition to trade in goods and services.

Consumers' buying binge came even though the percentage of Americans falling behind on their credit card bills jumped at the end of 1996 to the highest level on record.

The American Bankers Association said credit card delinquencies climbed in the fourth quarter to a record 3.72 percent of all accounts, up from 3.48 percent in the third quarter.

Economist James Chessen of the bankers association said lenders are tightening their standards for extending consumer credit and, in any case, are well positioned to handle losses generated by soured credit card accounts.

Indeed, the Federal Deposit Insurance Corp. said earnings at the nation's 9,528 commercial banks hit an all-time high of $52.4 billion last year, up 7.5 percent from 1995. Savings institution earnings slipped 7.9 percent to $7 billion. The combined total of bank and S&L failures - six - was the lowest in 24 years.