Retail Sales Rise at a Brisk 0.9% Pace in October : Industrial Production Gain Also Indicates Unexpected Strength in Economy

WASHINGTON — Retail sales shot up 0.9% in October, the strongest increase in seven months, the government said Tuesday in a report that heightened inflation fears in the financial markets.

Boosted by gains at department stores and auto dealerships, sales rose to a seasonally adjusted $135.6 billion, the Commerce Department said. It also revised its figures for the two previous months, showing a brisker sales pace than previously thought.

In response, bond prices fell Tuesday morning. Traders saw the report as a sign of inflation. Too much consumer demand can strain factory capacity, causing a shortage of goods and higher prices. It also could encourage more imports and retard progress on whittling the nation’s trade gap.

However, bond traders were hoping for good news today with the release of the merchandise trade deficit for September. Most economists expect a decline in imports to narrow the September deficit to between $9.5 billion and $11 billion, compared to $12.2 billion in August.

White House Pleased

In another economic report Tuesday, the Federal Reserve Board said its index of industrial production increased a moderately strong 0.4% in October, the biggest gain in three months.

“These numbers give a much different picture than just a month ago. Some people were betting the expansion would die of old age. These numbers refute that strongly,” said David Jones, an economist with Aubrey G. Lanston & Co., a government securities dealer in New York.

But he said that the unexpected strength has rekindled concern about inflation, which had waned as growth cooled in August and September.

“There’s the perception that in response, the Fed will move to tighten credit at least modestly, pushing up interest rates,” he said.

At the White House, spokesman Marlin Fitzwater said the reports “are both very positive and very encouraging for continued steady growth in the economy.”

“We see no evidence of rekindling inflation,” he added.

In the latest report, the government said retail sales fell 0.3% in September, up from an earlier estimate of a 0.4% decline, and rose 0.3% in August, rather than falling 0.1% as previously thought.

The October increase of 0.9% was the steepest since March, when sales shot up 1.6%. Most economists had expected a milder rise of about 0.3% last month.

Auto sales in October jumped 1.7% to $29.2 billion after falling 2.2% a month earlier. However, it was only the second increase since March.

Sandra Shaber, an economist with the Futures Group, a Washington consulting firm, said the pattern of retail buying is shifting from “hard goods,” such as autos and appliances, to “soft goods,” such as clothing, as the year winds up.

Excluding the automotive category, which is the most volatile, sales rose 0.7% last month after a 0.2% increase in September.

Sales at department and other general merchandise stores shot up 2.4% to $15.6 billion last month, after September’s 0.8% gain.

Hardware, garden and building supply stores reported no change in October after a 0.8% rise a month earlier.

Furniture stores posted a modest 0.2% gain after falling 0.3% in September.

Food and grocery stores reported a 1.1% gain, gasoline stations a 1.2% jump, specialty clothing stores a 1.3% increase and drug stores a 0.6% rise.

The only category reporting a decline was restaurants and bars, down 0.2% after a 1.3% increase in September.

For the first 10 months of the year, overall sales were up 6.1% over the same period of 1987, barely keeping ahead of the inflation rate.

The October gain in production at factories, mines and utilities was in line with economists’ expectations. It followed smaller increases of 0.2% in September, revised up from an earlier estimate of no change, and 0.3% in August. Production jumped 1.1% in July.

The index has not declined since September, 1987, a reflection of the strength in the manufacturing sector. A drop in the value of the dollar has triggered a surge in sales of U.S. goods overseas this year and a related boom in spending to expand and modernize factories.

Production in the manufacturing sector rose 0.5% in October, following a 0.4% gain in September. The Federal Reserve said automobiles were assembled at an annual rate of 7.6 million units, up from 7.4 million units a month earlier and 7.0 million units in August.

Production of business equipment jumped 0.8% for the second month in a row and stood 9.4% higher than a year ago. Within that category, production of manufacturing equipment rose 1.8% last month and 1.9% in September.

Output at mines, which includes oil and gas drilling, fell 0.9% in October, the third consecutive decline.