By Howard Schneider and Neil Irwin

Washington Post Staff Writers

Thursday, September 4, 2008; 4:31 PM

U.S. stocks fell sharply today after major retailers reported disappointing results for August in a sign that the economic jolt provided by recent tax rebates has begun to recede.

A spike in weekly unemployment claims -- in advance of new unemployment data due out Friday -- might also have contributed to the triple-digit decline in the Dow Jones industrial average that greeted traders this morning.

The bad news outweighed a jump in worker productivity and a report showing growth in the nation's service sector.

The Dow Jones industrial average closed down nearly 345 points, about 3 percent, at 11,188. The Nasdaq composite index fell 75 points, 3.2 percent, to 2,259 and the Standard & Poor's 500-stock index slid 38 points, 3 percent, to 1,237.

The Dow was also hurt by a sharp drop in shares of Boeing, where machinists voted to strike last night.

The disappointing results from retailers underscored concern that consumers might be pulling back in earnest to cope with rising energy costs and stagnant wages. August sales results, in the midst of the back-to-school shopping season, showed steady growth at discounters such as Wal-Mart and Costco, but a host of other companies suffered sometimes sharp declines.

Same-store sales at Wal-Mart increased 3 percent in August, compared with the same period a year before, beating analysts' expectations. Costco did even better, with same-store sales up 6 percent.

But bargain-hunting took its toll on a host of other companies. Upscale retailers such as Abercrombie & Fitch and Nordstrom suffered same-stores sales declines of 11 percent and about 8 percent respectively. Sales at department store chains also fell, with same-store sales at JCPenney off by 4.9 percent and falling by 5.8 percent in Kohl's stores.

Retail spending is a key component of U.S. economic activity. Consumer behavior has been watched with more than a little nervousness in recent months, with rising unemployment, higher prices and stagnant wages expected to eventually take a toll.

The most recent report on overall U.S. economic activity indicated that the economy grew faster than expected from April to June, as roughly $100 billion in tax rebates flowed to homes and businesses from the federal treasury.

The stimulus, however, was apparently short-lived. In its monthly survey of economic conditions across the country, the Federal Reserve yesterday said the economy has remained weak across most of the nation, despite some recent positive signs in economic indicators.

According to the Fed's "beige book," released yesterday, business conditions were "weak," "soft," or "subdued" across most of the country. Businesses reported strains brought on by a battered real estate market, tapped-out consumers and stubbornly high prices for staples.

"The economy is stabilizing, but at a very low level," said John Silvia, chief economist for Wachovia. "We're still losing jobs. We're not out of the woods at all."

The Fed's policymaking committee is almost certain to leave interest rates unchanged when it meets Sept. 16, reflecting continued weak growth and an easing of commodity prices in recent months. At its previous two meetings, the Fed left the rate at which banks lend to each other at 2 percent.

"Consumer spending was reported to be slow in most districts, with purchasing concentrated on necessary items and retrenchment in discretionary spending," said the beige book, which compiles reports from companies across the country.

Tourism was reported to be weak in Hawaii, demand for auto parts diminished in New England, and residential construction in parts of the Midwest rapidly declined. Sales of furniture and household appliances were weak almost everywhere, and auto sales were falling, especially for sport-utility vehicles and trucks.

In the past two weeks, indicators on the health of the economy have been better than initially forecast. Gross domestic product grew a surprisingly strong 3.3 percent in the second quarter, and yesterday the Commerce Department reported that new orders to factories rose 1.3 percent, considerably better than the 0.8 percent gain economists were expecting.

Indeed, there were glimmers of hope in yesterday's Fed report, captured in the weeks leading up to Aug. 25. Its language about the business environment, while dour, has been little changed in the past six months. That suggests that although the economy is weak, it is not experiencing a new major dip. And the report featured scattered bright spots in the economic outlook, including in the agricultural, energy, and mining sectors, and from international tourism.

"Energy and mining activity were strong and expanding in all of the districts that reported on those sectors," the beige book said, reflecting continued high prices for raw materials.

The real estate sector, however, remained dismal, as conditions "weakened or remained soft" in every part of the country except Plains states served by the Federal Reserve Bank of Kansas City. Commercial construction showed signs of weakening in all parts of the country except Texas and surrounding states -- probably because oil and natural gas production in that area has boosted the regional economy.

Prices remained high across the nation, but there are some signs that the pressures are abating as the prices of oil and other commodities begin to fall on global markets. "Business contacts in a number of districts indicated that they had increased selling prices in response to the high costs for their inputs," but wages were not rising rapidly, given the soft labor market, the report said.

"Businesses have a high level of uncertainty about what future sales are going to be, what their access to credit will be," Silvia said. "Given that uncertainty, it's not surprising that many are reluctant to invest and hire workers."