Consumer spending jumps 0.8%

It hits 7-month high, but income sees only slight rise

Laurie Hanson looks at clothes in February at the Adorn store in Montpelier, Vt. The Commerce Department said Friday that consumer spending rose. But taking inflation into account, income after taxes fell for a second-straight month.
Laurie Hanson looks at clothes in February at the Adorn store in Montpelier, Vt. The Commerce Department said Friday that consumer spending rose. But taking inflation into account, income after taxes fell for a second-straight month.

— U.S. consumers increased their spending in February by the most in seven months. But income barely grew, and the savings rate fell to its lowest point in more than two years.

The Commerce Department said Friday that consumer spending rose 0.8 percent last month. Income grew 0.2 percent, matching January’s weak increase. And when taking inflation into account, income after taxes fell for a second-straight month.

Still, consumers are spending more after the best threemonth hiring stretch in two years. Paul Dales, an economist at Capital Economics, suggested that estimated annual growth for the economy in the current January-March quarter may be revised up — to about 2.5 percent, compared with earlier estimates of about 2 percent.

Dales cautioned, though, that at some point, consumers won’t be able to draw further on their savings. Further job gains are needed to boost consumers’ income.

Some of the higher spending last month reflected surging gasoline prices. But consumers spent more on other goods and services, too. After excluding inflation, which was attributed mainly to gasoline prices, spending rose a solid 0.5 percent.

The savings rate dropped to 3.7 percent of after-tax income in February. That was the lowest level since August 2009. The savings rate had been 4.3 percent in January. It had averaged 4.7 percent for all of last year.

The economy has added an average of 245,000 jobs a month from December through February. That’s lowered the unemployment rate to 8.3 percent, the lowest in three years. Most economists expect a similar number of net jobs added in March.

So far, more robust hiring has yet to lift growth. The economy grew at an annual rate of 3 percent in the October-December quarter and most analysts expect that pace slowed in the January-March quarter.

Consumer spending drives 70 percent of economic activity.

“Consumer spending is going to hold its ground,” said Chris Christopher Jr., a senior principal economist at IHS Global Insight in Lexington, Mass. “There seems to be a positive feedback between better employment numbers and spending.”

Americans stepped up spending on retail goods in February, the government said earlier in the month. Consumers bought more autos, clothes and appliances. They also spent more on gasoline.

On Friday, the national average price for a gallon of gasoline was $3.92, according to AAA. In 11 states, the price is more than $4 per gallon. In Arkansas, the average price Friday was $3.77.

Higher gasoline prices could eventually slow growth by causing some people to cut spending on other goods, from appliances and furniture to electronics and vacations. Gasoline purchases provide less benefit for the U.S. economy because about half of the revenue flows to oil-exporting nations, though U.S. oil companies and gasoline retailers also benefit.

“Higher energy prices would probably slow growth, at least in the short run,” Federal Reserve Chairman Ben Bernanke said March 21. Rising fuel costs create “short-term inflation pressures, and moreover, they act as a tax on household purchasing power and reduce consumption spending, and that also is a drag on the economy.”

Information for this article was contributed by Timothy R. Homan and Lorraine Woellert of Bloomberg News.

Business, Pages 28 on 03/31/2012

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