* Consumer spending rises 0.7 percent in February
* Inflation adjusted spending up 0.3 percent
* Income increases 1.1 percent, disposable income up
* Report bolsters view of stronger first-quarter growth
* Consumer sentiment rises on improving job market outlook
By Lucia Mutikani
WASHINGTON, March 29 U.S. 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
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
Some economists bumped up their first-quarter economic
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
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 Jan. 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