Reports Show Income Is Up, and So Is Spending

Data reported on Friday also showed a rebound in income growth, putting the economy in a better shape to deal with tighter fiscal policy, particularly $85 billion in across-the-board federal government spending cuts known as the sequester.

“The economy is in a good place now in terms of momentum and strength, and it will need it as the government spending cuts will take something off growth as the year progresses,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York.

Consumer spending increased 0.7 percent last month after a 0.4 percent rise in January, the Commerce Department said.

Part of the increase in spending, which accounts for about 70 percent of United States economic activity, was because of higher gasoline prices. But Americans also bought long-lasting goods like automobiles and spent more on services. The price of gas rose 35 cents a gallon last month.

After adjusting for inflation, spending was up 0.3 percent after rising by the same margin in January. Economists said it was headed toward its fastest growth pace since 2010.

“It appears that consumer spending actually accelerated in the first quarter despite the tax hikes implemented at the start of the year,” said Daniel Silver, an economist at JPMorgan in New York.

Some economists bumped up their first-quarter economic growth estimates.

Barclays raised its gross domestic product forecast by 0.7 percentage point, to 3.3 percent. Macroeconomic Advisers lifted its estimate by three-tenths of a point to 3.5 percent. The economy grew a 0.4 percent annual pace in the fourth quarter.

A separate report showed that households this month seemed to shrug off the deep government spending cuts. The Thomson Reuters/University of Michigan index of consumer sentiment rose to a reading of 78.6, from 77.6 in February.

“Consumers have discounted the administration’s warning that economic catastrophe would follow the reductions in federal spending, and consumers have renewed their expectation that gains in employment will accelerate through the rest of 2013,” said the survey’s director, Richard Curtin.

And they have reason to be optimistic. With steady improvement in the labor market, income increased a healthy 1.1 percent after tumbling 3.7 percent in January.

Employment growth gained steam in February, factory activity touched a one-and-a-half-year high and first-time filings for jobless benefits have increased just modestly so far in March.

Last month, the income at the disposal of households after inflation and taxes increased 0.7 percent, after dropping 4 percent in January.

With income growth outpacing spending, the saving rate — the percentage of disposable income that households save — rose to 2.6 percent, from 2.2 percent in January.

The higher gasoline prices pushed up inflation, with a price index for consumer spending rising 0.4 percent after being flat for two straight months. February’s increase in the PCE index was the largest since August.

But a core reading that strips out food and energy costs rose only 0.1 percent after increasing 0.2 percent in January, showing no sign of underlying inflation pressures. Core prices were up 1.3 percent, well below the Federal Reserve’s 2 percent target.

The benign inflation picture should give the Fed room to continue with its monetary stimulus as it seeks to bolster job growth.

Article source: http://www.nytimes.com/2013/03/30/business/economy/reports-show-income-is-up-and-so-is-spending.html?partner=rss&emc=rss