Oct. 15 (Bloomberg) -- U.S. retail sales rose by the most in six months in September, as discounts generated the biggest jump in spending for autos in three years. The pace may slow as record oil prices weigh on consumer confidence and manufacturing.

Retail sales rose 1.5 percent, after a 0.2 percent decline in August, the Commerce Department said in Washington. Sales rose 0.6 percent excluding autos. While both figures exceeded median forecasts, pushing down bond prices and helping retailer shares, other reports suggested companies and consumers are cautious about the economic outlook.

``Our view is the fourth quarter is going to be OK but not as strong as the growth we had in the first half,'' George Pipas, Ford Motor Co.'s manager of sales analysis, said in an interview.

A 71 percent surge in crude oil prices over 12 months and job growth that slowed from earlier this year may limit the pace of economic expansion. October consumer confidence fell to the lowest since April 2003, a private survey said. Factories in September trimmed production and received fewer orders this month, Federal Reserve reports showed.

``The drop in confidence suggests that the strength seen in today's retail sales report may prove to be transitory,'' said Christopher Low, chief economist at FTN Financial in New York. Oil prices rose between surveys for retail in September and confidence this month, he said.

Consumer confidence fell to 87.5 this month from 94.2 in September in a University of Michigan survey. The median forecast was 94 in a Bloomberg News survey.

Industrial Production

Industrial production in September rose 0.1 percent, less than expected, and the manufacturing component declined, the Federal Reserve said today. The Federal Reserve Bank of New York's separate regional index, which offers the first clues to the performance of manufacturing in the month, fell to 17.4 in October from 27.3. Readings above zero indicate expansion.

Fed Chairman Alan Greenspan said in a speech that oil prices aren't high enough to spark inflation and slow growth like the U.S. experienced in the 1970s.

``The impact of the current surge in oil prices, though noticeable, is likely to prove less consequential to economic growth and inflation than in the 1970s,'' Greenspan said in the text of remarks to the National Italian American Foundation in Washington. ``The risk of more serious negative consequences would intensify if oil prices were to move materially higher.''

This year, the rise in the cost of imported oil has amounted to about three-fourths of a percentage point of economic growth, he said.

Markets

``Oil is not as important to the economy as it once was, but it's still very important. It takes a bigger price increase to have a significant effect on the economy, but we have had such a shock,'' said Peter Morici, a business professor at the University of Maryland in College Park, Maryland. ``We are getting to the point where it bites.''

U.S. Treasury notes fell for the first day this week after the higher-than-expected retail sales bolstered speculation that the Fed will stay on a path of what it calls ``measured'' interest rate increases. The benchmark 10-year note due in August 2014 fell almost 1/4 point, pushing the yield to 4.05 percent at 3:30 p.m. in New York from 4.02 percent yesterday. Wal-Mart Stores Inc., the world's biggest retailer, rose 50 cents to $52.60.

Inflation stayed tame in September as producer prices rose 0.1 percent, the Labor Department said today. Average New York crude oil prices rose 2.3 percent from August to $45.93 a barrel in September. The price has since resumed its surge, reaching a record $54.88 yesterday.

Election

Today's reports were released two days after president George W. Bush and Democratic challenger John Kerry squared off in the last of three debates before next month's election. Kerry, a four-term U.S. senator from Massachusetts, said Bush shortchanged the middle class on jobs, health care and taxes. Bush called his opponent's record and proposals ``out of the mainstream.''

General Motors Corp. and Ford were among automakers to attract customers with special financing and price breaks last month to help clear dealer lots.

``We don't like to see oil prices at this level,'' Paul Ballew, executive director of market and industry analysis at General Motors, in an interview. ``It says a lot about the resiliency of the U.S. economy we've been able to weather this shock.''

Economists expected retail sales would rise 0.7 percent last month after a previously reported drop of 0.3 percent in August, based on the median forecast of 72 estimates in a Bloomberg News survey. Sales excluding automobiles were expected to rise 0.3 percent after rising 0.2 percent in August.

Auto Sales

Retail sales account for almost half of all consumer spending, which accounts for about two-thirds of the economy.

Sales at automobile dealerships and parts stores rose 4.2 percent last month after falling 1.3 percent. Sales of cars and light trucks jumped to 17.5 million vehicles at an annual rate in September, a 5.4 percent increase from August, according to industry figures released Oct. 1. Auto sales last quarter were the strongest in a year.

``This all proves that if you discount enough, consumers are still willing to dig deep into their wallets,'' said Sherry Cooper, chief economist at BMO Nesbitt Burns Inc. in Toronto.

General Motors raised incentives by 6.1 percent last month to $5,168 and Ford's rose by 5.6 percent to $5,179, according to CNW Marketing Research, an industry group. General Motors, the world's largest automaker, reported yesterday its first loss from car manufacturing in North America in six years.

Hurricanes

Sales at general merchandise stores, which include department stores, rose 1.1 percent last month, the most since February, after falling 0.3 percent in August. Sales at clothing and accessory stores rose 0.8 percent after dropping 0.7 percent. Department stores sold 0.9 percent more merchandise than the month before.

Sales at building material and garden supply stores rose 1.4 percent, the most in six months, after a 0.7 percent increase in August. The jump may be due to purchases to brace for the three hurricanes that hit the southeastern U.S. last month, and to make repairs afterward, according to economists.

``You can't keep people out of the stores, especially when they need to shore up their homes in the face of hurricanes,'' said Joel Naroff, president of Naroff Economic Advisors in Holland, Pennsylvania.

Shopping Patterns

The rising cost of gasoline and other forms of energy poses a threat for the economy in coming months as it siphons money from consumers' pockets, causing spending on other goods and services to slow. The average retail price for all grades of gasoline rose to $2.04 a gallon in the week that ended Oct. 11, the highest in four months, according to figures from the Energy Department. The price reached a record $2.10 a gallon in May.

``We do think that there is some effect by the higher gas prices,'' Jeff Noddle, chief executive of Supervalu Inc., the owner of Shop 'n Save and Save-A-Lot supermarkets, said in an interview yesterday. There is ``some evidence of shopping patterns changing somewhat.''

Customers are making fewer trips to Eden Prairie, Minnesota- based Supervalu's stores, instead buying more during each visit to prevent having to make a return trip, Noddle said.

Consumer spending is projected to grow at a 3.1 percent annual pace this quarter compared with a 4 percent rise forecast for the third quarter, according to the median forecast of economists surveyed in a separate Bloomberg News survey earlier this month. The slowing will cause the economy to cool to a 3.8 percent pace of growth this quarter from 4 percent, the survey showed.

High fuel costs are coming at a time when employment gains are falling short of expectations. Employers added 96,000 workers to payrolls in September, the Labor Department reported Oct. 8. An average 103,000 people a month found jobs in the third quarter, compared with 204,000 a month in January through June.

To contact the reporter on this story: Carlos Torres in Washington ctorres2@bloomberg.net.

Last Updated: October 15, 2004 15:36 EDT