Consumers will keep spending as U.S. headwinds reverse

American consumers, who kept shopping through rising fuel costs and delayed tax refunds, will probably continue buoying the world’s largest economy as these hurdles dissipate.

After reaching a four-month high in February, gasoline prices have retreated in March at a time when they typically rise. Cash returns from the Internal Revenue Service, held up when an agreement to avert the fiscal cliff came at the last minute, have almost caught up to last year’s pace.

“Headwinds in February were temporary,” said Neil Dutta, head of U.S. economics at Renaissance Macro Research LLC in New York. “They are going to be tailwinds in March.”

Economists are boosting spending estimates as retailers from Darden Restaurants Inc. to Ross Stores Inc. say industry sales are picking up. Employment gains, the drop in energy costs, rising stock prices and reduced debt mean households have the wherewithal to overcome a payroll-tax increase that took an additional 2% out of take-home pay this year.

“You’re seeing an improving trajectory in the labor market, which means stronger aggregate wages and salaries, and that’s going to be good for consumer spending,” Dutta said.

Stocks advanced today, sending the Standard & Poor’s 500 Index toward its record high, as the euro area’s finance ministers agreed that Cyprus has met the conditions for a bailout. The S&P 500 climbed 0.5% to 1,564.39 at 9:50 a.m. in New York.

Spending projections climbed after a Commerce Department report this month showed retail sales jumped 1.1% in February, the biggest gain in five months. Eight of 13 major categories showed an increase in receipts, including auto dealers, building-material stores and Internet merchants.

Boosting Forecasts

The median estimate among the 30 forecasters who submitted consumer-spending projections after the retail sales data called for a 1.8% increase this quarter, according to a Bloomberg survey taken from March 8 to March 13, compared with a median of 1.4% for all those polled in February.

Retail sales rose in February even as gasoline prices climbed and tax refunds were delayed. A reversal of those challenges this month has brightened the outlook.

Last month saw the highest average gasoline price for any February since AAA, the largest U.S. automobile group, began tracking data in 2004.

A drop this month will have added significance because the fuel’s cost usually rises in March, making the current decline even bigger when the figures are adjusted for seasonal variations. The average price of regular gasoline at the pump fell 2.8% through March 24, compared with a 5.2% gain for the month on average over the past five years. Since 2005, the cost has not declined in March.

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