Shoppers are bewildering Wall Street.

Financial markets sold off sharply last week after the government reported that consumers went on an unexpected winter spending fling that could raise the economy's first-quarter growth rate.

While the inflation front remains quiet and markets stabilized Friday, hearty business conditions might still prompt the Federal Reserve to apply the brakes by raising interest rates. Fed policymakers next meet on March 25.

The reason is clear. Some Wall Street economists now think the nation's economy is growing at a 4% annual rate, which is well beyond the 2.5% speed limit the central bank is believed to consider safe for sustained noninflationary growth.

To be sure, some observers think the unusually mild winter in the populous Northeast prompted the Commerce Department's revision of January retail sales to monthly growth of 1.4%, excluding autos. Growth was previously estimated at 0.4%.

But even economists with workable explanations for the large jump in sales, followed by a 0.5% gain in February, have taken to hedging their bets concerning the Fed.

The latest price report, showing a 0.4% deflation in the February producer price index, "encourages the Fed to remain on hold at the March 25 meeting, but it is a close call," said Merrill Lynch & Co. economist Bruce Steinberg.

Fed action, and higher rates as a result of bond market activity, must now be seen as "real possibilities," said economist David A. Levy, who changed his economic forecast after studying recent strong consumer behavior more closely.

His conclusion is that affluent people, buoyed by the "wealth effect" of the long bull market in stocks, have been spending much more and saving considerably less than previously believed.

"These are the people responsible for the strong vacation home rentals, luxury sport utility vehicle sales, and high-end department store volume," he said. "These consumers can splurge without using consumer credit."

Until recently, Mr. Levy, along with some other economists, believed the economy was overdue to slow down because of what appeared to be a "fading consumer credit cycle," together with record consumer debt and debt-service burdens.

"It now appears that the economy has been propelled ... over the past year or two by strikingly more aggressive consumer behavior than the official data indicate," said the economist, who prepares the Industry Forecast newsletter at the Jerome Levy Economics Institute of Bard College, Annandale, N.Y.

"We now believe that personal savings has actually fallen, not risen, over the past two years," he said. That is the "only plausible theory" that explains what Mr. Levy believes has been a misleading statistical picture of the economy.

And he offered a warning: "An expansion powered by consumers spending against wealth gains is an extremely unreliable one. Be prepared for the possibility of a rapid deterioration in sales and profits."

That is because, Mr. Levy said, "the possibility of a bear stock market now appears to carry much more risk for consumer spending and for the economy generally."

The timing of a consumer pullback "now appears much less certain," but when the retrenchment finally occurs, it will probably be more serious than he and others had previously expected.

Mr. Levy said he thinks the unusual spending activity influenced by the stock market has been driving the economy since the fourth quarter of 1994, providing "a king-sized boost" to corporate profits that has not been adequately accounted for in the government's economic data.

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