WASHINGTON Consumer spending rose in February and sentiment among Americans perked up this month, further signs of an acceleration in economic activity in the first quarter after a near stall late last year.
The data 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.
Though part of the increase in spending, which accounts for about 70 percent of U.S. economic activity, was because of higher gasoline prices, Americans also bought long-lasting goods such as automobiles and spent more on services.
Gas prices at the pump increased 35 cents a gallon last month.
After adjusting for inflation, spending was up 0.3 percent after advancing by the same margin in January. As a result, economists said consumer spending in the first quarter was on track to record 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 their estimate by three-tenths of a point to 3.5 percent.
The economy grew at only a 0.4 percent annual pace in the fourth quarter.
A separate report showed households this month shrugged off the deep government spending cuts, focusing instead on a steady labor market improvement, which is starting to boost wages.
The Thomson Reuters/University of Michigan's index of consumer sentiment rose to 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 survey director Richard Curtin.
And they have reason to be optimistic. Income increased a healthy 1.1 percent after tumbling 3.7 percent in January.
Personal income had increased sharply in December as businesses rushed to pay dividends and bonuses before tax hikes took effect this year. That also skewed income data for January.
U.S. financial markets were closed for Good Friday and will reopen on Monday.
LITTLE SIGN OF FISCAL DRAG
A 2 percent payroll tax cut expired on January 1 and tax rates for wealthy Americans also went up. The consumer spending and sentiment reports were the latest to show little sign the tighter fiscal policy has been a major drag on the economy.
Employment growth gained steam in February, factory activity touched a 1-1/2 year high and first-time filings for jobless benefits have only increased 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 households are socking away - 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.
Over the past 12 months, inflation has risen 1.3 percent after a similar gain in the period through January.
Core prices were up 1.3 percent, well below the Federal Reserve's 2 percent target. They also had risen 1.3 percent in the 12 months through January.
The benign inflation picture should give the U.S. central bank room to continue with its monetary stimulus as it seeks to boost job growth.
The Fed said last week it would maintain its monthly $85 billion purchases of mortgage and Treasury bonds until it saw a substantial improvement in the job market.
"This is plenty of ammunition for all those Fed officials, who currently do not want to scale back the degree of monetary accommodation," said Harm Bandholz, chief U.S. economist at UniCredit Research in New York.
"For investors this must look like Goldilocks: Better economic data and ongoing monetary accommodation at the same time."
(Reporting by Lucia Mutikani, additional reporting by Luciana Lopez in New York; Editing by Neil Stempleman)