WRAPUP 4-Taxes squeeze US households, factories to add to growth

Fri Mar 1, 2013 4:47pm EST

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* Consumer spending rises 0.2 percent in January
    * Income falls 3.6 percent, largest drop since 1993
    * Income drop partly due to tax hikes, special factors
    * Saving rate falls to 2.4 percent, lowest since 2007
    * Factories grow at fastest pace in 1-1/2 years in February

    By Lucia Mutikani
    WASHINGTON, March 1 (Reuters) - U.S. consumer spending was
tepid in January as higher taxes squeezed incomes, but vigor in
the manufacturing sector last month suggested economic growth
picked up early this quarter.
    Other data on Friday showed strong auto sales and a rise in
consumer sentiment in February, which should help support
spending.
    The reports suggested the economy had enough momentum to
withstand the $85 billion in federal budget cuts known as the
"sequester" that were set to start taking hold on Friday, but
not so much as to convince the Federal Reserve to decrease its
monetary support for the recovery.
    "The numbers say the economy does have a reasonable amount
of momentum that is probably enough to deal with whatever comes
from the sequestration," said Bill Cheney, chief economist at
John Hancock Financial Services in Boston.
    Consumer spending, which accounts for about 70 percent of
U.S. economic activity, increased 0.2 percent in January, the
Commerce Department said. The increase was driven by spending on
utilities after a cold snap.
    After adjusting for inflation, spending was up just 0.1
percent.
    In a separate report, the Institute for Supply Management
said its index of national factory activity rose to 54.2 in
February on strong orders growth. It was the highest level since
June 2011 and followed as reading of 53.1 in January.
    A reading above 50 indicates expansion in manufacturing and
the rise bucked the global trend, where factories in the euro
zone were mired in weakness and activity in China slowed.
    The report suggested manufacturing will continue to support
U.S. growth, a welcome sign as consumer spending is expected to
pull back sharply this quarter due to higher taxes.
    "We expect a significant decrease in real consumer spending
in the first half of the year," said Yelena Shulyatyeva, a U.S.
economist at BNP Paribas in New York.
    Shulyatyeva said she expects the economy to advance at a
meager 1.2 percent annual rate in the first quarter. In the
final three months of last year, it rose at a 0.1 percent pace,
even as consumer spending rose at a healthy 2.1 percent rate.
    U.S. stocks closed higher on the factory and confidence
reports, while the dollar hit a six-month high against a basket
of currencies. U.S. Treasury debt prices rose on worries that
the automatic government spending cuts would dent growth.
    The International Monetary Fund said on Thursday that the
cuts, if fully implemented, could shave at least half a
percentage point from growth this year.

  
   
    TAXES ERODE INCOMES
    The pressure on spending from the expiration of a 2 percent
payroll tax cut and higher tax rates for wealthy Americans is
expected to be even larger in February and possibly extend
through the first half of the year.
    But there is reason to be cautiously optimistic.
    U.S. auto sales rose nearly 4 percent in February and were
above a 15-million unit annual rate for a fourth straight month,
the first time this has happened since early
2008. 
    In addition, the Thomson Reuters/University of Michigan's
consumer sentiment index rose to 77.6 in February from 73.8 in
January, amid optimism over jobs. 
    Steady job growth should help support spending, given that
income tumbled 3.6 percent in January, the largest drop since
January 1993. Part of the decline was payback for a 2.6 percent
surge in December as businesses rushed to pay dividends and
bonuses before taxes moved higher.
    Taking taxes into account, income plunged a record 4.0
percent in January after advancing 2.7 percent in December.
    With income dropping sharply, consumers put a brake on their
spending to pay their bills. The saving rate - the percentage of
disposable income households are socking away - fell to 2.4
percent, the lowest level since November 2007. The rate had
jumped to 6.4 percent in December.
    The report showed inflation under wraps with a price index
for consumer spending flat for a second straight month and a
core reading that strips out food and energy costs up just 0.1
percent.
    Over the past 12 months, inflation has risen just 1.2
percent, the smallest gain since October 2009 and a slowdown
from the 1.4 percent logged in the period through December.
    Core prices are up 1.3 percent, the smallest rise since
April 2011 and well below the Fed's 2 percent target.
    The lack of inflation should come as welcome relief for
American households, but it could cause some nervousness at the
U.S. central bank, which may see it as a symptom of the
economy's weakness.
    In testimony to Congress this week, Fed Chairman Ben
Bernanke signaled that the central bank would press forward with
plans to buy $85 billion in bonds per month.
    "The poor performance in real spending activity will
continue to augur for more policy accommodation as they try to
provide a monetary offset for the expected fiscal drag, which
should accelerate in the second quarter," said Millan Mulraine,
a senior economist at TD Securities in New York.
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