Spending surges in strong quarter

Consumers went on a tear last month, boosting retail sales by 1.8 percent in a performance that capped one of the most robust shopping quarters in years, the Commerce Department reported yesterday.

The startling surge in spending, which follows strong sales gains of 1 percent and 0.5 percent in the previous two months, prompted economists to raise their estimates of first-quarter growth to as high as 6 percent from 4 percent previously.

The blowout sales gains were led by record spending at hardware stores and took financial markets by surprise. The Dow Jones Industrial Average rallied at first in response to the report, but dropped 134 points to 10,381 on worries that the growth surge will prompt the Federal Reserve to raise interest rates in coming months.

“This is a huge number, one of the strongest I’ve ever seen,” said Cary Leahey, economist at Deutsche Bank Securities. The firm expects to raise its forecast for first-quarter growth to 6 percent. The retail report shows about half of all consumer spending, which is the biggest contributor to economic growth.

The sales increase in March was the strongest in a year, and a 1.7 percent gain in sales excluding autos was the highest in four years.

Homeowners decorating and furnishing the millions of new houses they have bought in recent years pushed sales at hardware stores up by a record 10.6 percent, while sales at furniture stores posted a strong 1.2 percent gain.

Consumers also increased spending on clothing and cars by nearly 2 percent, and showered money on products ranging from health and beauty aids to restaurant meals and groceries.

“The picture clearly emerging is that of a resurgent economy,” because the sales report comes barely a week after a blockbuster employment report that showed a sharp acceleration in job growth in March, said Bill Cheney, chief economist with John Hancock Financial Services Inc.

Another report released yesterday showed that business inventories rose 0.7 percent in February, the most in three years, as companies struggled to keep up with booming demand. Inventories remain lean, the Commerce report said, suggesting that more spending on business stockpiles lies ahead.

The consumer spending report showed the beneficial effect of tax refunds, which are running $11 billion ahead of last year’s, Mr. Cheney said. Consumers should be bolstered even more in the months ahead by the revival of growth in jobs.

“Unless we get hit with something unexpected, we’re back in the virtuous cycle of growing employment and incomes and growing individual and capital spending,” he said. “As an added bonus, the economy is also getting a boost from strong government spending” on defense and other areas.

Despite fears in the financial markets, Mr. Cheney said, he does not expect the signs of booming growth to prompt a rate increase by the Fed before August unless “we get a couple of more stunning months like this one.”

“No good deed goes unpunished is perhaps the best way to characterize today’s stock market sell-off,” said Lawrence Kudlow of Kudlow & Co. “The Fed said it will be patient, but the market knows that a 5 percent economy in the first quarter will set the stage for big job gains in the spring.”

The Fed has not raised interest rates in five years, so the possibility of higher rates this year presents a formidable hurdle for stocks, which benefit in many ways from low borrowing rates.

Mr. Kudlow said he thinks that stocks ultimately will move higher because of the outstanding profits being reported at many companies, which he expects to continue.