WASHINGTON - Already-frazzled Wall Street investors reacted badly Monday to news that Americans are earning and spending at a robust pace. Stocks fell sharply on fears of more interest-rate increases from a Federal Reserve intent on keeping the economy from overheating.
Americans' personal incomes surged 0.9 percent in February, the largest gain in eight months, the Commerce Department said. It was the largest advance in incomes since June 1996 and more than doubled January's 0.4 percent gain.
Spending growth - 0.3 percent - was relatively modest but came after a large 1 percent increase in January, the best in 11 months.
Economists said February's broad-based income gain - with advances in every category except farm income - will help provide consumers with the wherewithal to support strong spending through midyear. About four-fifths of the advance came in wages and salaries of private-sector jobs.
"People spend that money; they don't save it," said economist Sandra Shaber of the WEFA Group in Eddystone, Pa. "More jobs and more paychecks certainly equal growth in spending in the months ahead."
That kind of thinking sent jitters rippling through the stock market because it implies that last week's quarter-point increase in short-term interest rates won't be enough to keep economic growth at or below the pace likely to produce accelerating inflation.
The Dow Jones average of industrial stocks was down more than 100 points by midafternoon. That came on top of a 140-point decline last Thursday on news that existing home sales in February posted the biggest increase in more than a decade. Markets were closed on Good Friday.
Economist Richard Berner of Mellon Bank in Pittsburgh predicted Federal Reserve policy-makers - who have meetings scheduled in late May, early July and August - would boost rates several more times.
"When the Fed decided to implement its game plan and tighten monetary policy, I don't think they had just one step in mind. I think they had three steps in mind," said Berner said. "We're going to see them get on with that game plan fairly quickly."'
With Monday's drop, stocks are down nearly 6 percent from the Dow's March 11 peak of 7,085.16, and economist David Jones of Aubrey G. Lanston & Co. said the decline could total 10 percent to 15 percent before the correction runs its course.
"The key to the story is the bond market. ... Rising interest rates have triggered large institutions - mutual funds, insurance companies - to shift some of their funds out of stocks into bonds," Jones said. "At least over the rest of the year that (bond) yield will be more attractive than the return on a volatile stock market."
A Labor Department report scheduled Friday - the government's first broad-based look at the economy in March - could be the next big market-roiling event if it comes in stronger than expected, Jones said.
Analysts are looking for the unemployment rate to hold at 5.3 percent and for a gain of about 180,000 jobs.
Monday's income and spending figures were about what economists anticipated for February. But revisions to earlier months' spending were a surprise.
The 1 percent spending gain in January was revised up from a previous estimate of 0.7 percent. And December spending was reported up 0.4 percent, double the last estimate.
That's significant since consumer spending represents about two-thirds of economic activity.
In details from February's income and spending report, the Commerce Department said:
- Private wages and salaries surged 1.5 percent after declining 0.2 percent the month before.
- Disposable personal income, income minus taxes, grew 0.8 percent after a 0.7 percent gain in January.
- Americans' saving rate - savings as a percentage of disposable income - was 5.5 percent, the best in five months.
- Spending on durable goods, expensive items meant to last three or more years, rose 0.1 percent; on nondurable goods, 0.3 percent; and on services, 0.4 percent.