The macro picture on consumer spending, the foundation of the economy's current expansion, took a turn for the worse on Thursday as oil hit another record and numerous retailers reported sinking sales. But at the micro -- or stock-specific -- level, some of the results weren't as bad as predicted, providing a one-day boost for the

Gap

(GPS) - Get Report

,

Dillard's

(DDS) - Get Report

and other retailers.

The retailers' jujitsu moves couldn't help the broader market, however, as higher oil and new questions about the safety of top-selling drugs weighed on major averages.

The

Dow Jones Industrial Average

lost 1.1% to 10,125.40 as component drugmakers

Merck

(MRK) - Get Report

,

Johnson & Johnson

(JNJ) - Get Report

and

Pfizer

(PFE) - Get Report

tumbled 2% to 4% each. The

S&P 500

sank 1% to 1130.65 and the

Nasdaq Composite

shed 1.1% to 1948.52.

Not So Bad, Not So Good

As

TheStreet.com's

Nat Worden

reported, the retail sales reports were bad but not as bad as Wall Street's worst fears. Chain store sales overall increased 2.4% in September, according to the International Council of Shopping Centers. That was better than August's 1.3% gain, but below the 3% to 4% rates seen in the first half of the year.

Still, the one-day price gains in retailers' stocks weren't very reassuring as almost all names were bouncing off of recently depressed levels. The Gap, where same-store sales fell 3%, added 43 cents to $19.41, still down from almost $26 back in June. At Dillard's, where same-store sales also dropped 3%, the shares added 41 cents to $20.19, short of over $23 back in August.

Third-quarter retailers' earnings reports may not be as bad as the market had been expecting, while future results could be in trouble, according to Lizabeth Dunn, an analyst at Lehman Brothers: "We don't see much risk in the current quarter but we believe the risk increases as we move into (the fourth quarter) and next year," she wrote.

Stores that actually showed above-average sales gains had above-average price jumps, too.

Chico's

(CHS) - Get Report

saw same-store sales rise 5.2% and its shares added $2.25 to $37.95.

With numerous retailers reporting poor sales, the

Fed's

August report on consumer credit released on Thursday added to the portrait of the overextended consumer.

For the first time in almost a year, consumers paid down more on loans excluding mortgages than they borrowed. Loans outstanding contracted at a 1.4% annualized rate. The decline was entirely in so-called revolving credit like credit cards, not in nonrevolving credit like auto loans.

Part of the decline no doubt can be accounted for by rising interest rates. Even though some long-term rates have fallen since the Fed began hiking short-term rates, credit card rates are on the upswing. The average credit card rate was 12.83% at the end of August, up from 12.68% at the end of June. Car-loan rates edged up to 6.55% from 6.47%.

Over the longer term, with consumers carrying record levels of debt and spending increasing faster than incomes, paying down borrowings has to be a positive. If consumers keep adding debt as rates rise, when a recession eventually comes, there could be a huge mess. Even today, with interest rates still pretty low, bankruptcies are at record levels of 1.6 million a year.

In the short term, however, consumer spending has been the main contributor to growth in real gross domestic product. Unless businesses suddenly decide to be a lot less frugal, consumer spending must stay robust to keep growth from dropping way off.

Higher rates are going to squeeze consumer finances further, as each Fed rate hike leads to higher rates on revolving debts like credit cards and home equity loans.

Those hikes are likely to continue. On Thursday, Federal Reserve Governor Ben Bernanke told reporters after a speech in New York that the economy was growing at a rate above its potential, signaling the unlikelihood that the Fed will pause its rate hikes soon.

Only a more serious slowdown would change the path, he implied. "If a slowing of the economy, for example, justifies a pause, that certainly will be the response," he said. "The path of policy the markets are pricing in is, broadly speaking, reasonable."

The likelihood of continued hikes hit bonds as well, with the yield on the Treasury's 10-year note rising to 4.24%.

The Fed's rosy outlook could dissolve as soon as Friday, of course, when the Labor Department issues the jobs report for September. Colleague

Rebecca Byrne, who has nailed the tenor of the last two reports, says the risks lie on the side of a weaker-than-expected reading. The consensus estimate is for a gain of 150,000.

Homebuilding and Oil Quips

Higher rates and more company-specific issues ended the one-day reprieve for homebuilders.

M/I Homes

(MHO) - Get Report

, a relative small fry that focuses on the Southeast and Midwest, reported a 14% decline in new orders in the third quarter and a 22% drop in traffic. The company's backlog of homes on order fell 5% to 2,966, although a 15% jump prices pushed the value of the backlog up 10% to $866 million.

CEO Robert Schottenstein said business had picked up at the end of the quarter but noted that conditions in the Midwest "continue to be challenging." M/I shares fell 1.5% to $39.44.

Also,

D.R. Horton

(DHI) - Get Report

reported orders in its just-completed quarter grew 10%, but that was below the average rate in the previous three quarters of 19% and less than some analysts had expected, Lehman Brothers says. Big price increases pushed the dollar value of the orders up 17%. Remember that the price increases for new orders are hardly locked in, as

Pulte Home's

(PHM) - Get Report

announcement on Monday showed.

D.R.'s shares lost 5.5% to $29.31. Pulte lost 5.5% to $50.55 and

Toll Brothers

(TOL) - Get Report

, which issued a bullish outlook on Wednesday, saw its shares drop 2.2% to $43.80.

Finally, oil closed at $52.67 a barrel Thursday after trading above $53 earlier. The Energy Department predicted on Wednesday that winter heating bills would be 28% higher than in 2003.

Morgan Stanley analyst Rick Bensignor had a good quip in a piece admitting that his previous prediction oil had peaked was wrong.

"Even though I have already read some reports that the crude market 'has become the Nasdaq of 1999,' I'm guessing they're only partially correct. I think it is more like the Nasdaq of 1997."

In keeping with TSC's editorial policy, Pressman doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send

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