Consumer spending in the U.S. climbed in February by the most in five months as incomes rose, signaling an improving job market is spurring demand.
Household purchases, which account for about 70% of the economy, gained 0.7% after a 0.4% advance the prior month that was bigger than previously estimated, a Commerce Department report showed today in Washington. The median estimate in a Bloomberg survey of 78 economists called for a 0.6% rise. Incomes increased 1.1%, more than projected, sending the saving rate up from a five-year low.
Labor market progress and an increase in household wealth linked to rising home values and stocks are helping Americans cushion the fallout of higher payroll taxes and costlier fuel. Strength in purchases is one reason economists project the economy picked up this quarter after slowing to a 0.4% annual rate in the final three months of 2012.
“The economy is in a very good place right now ahead of the fiscal restraint,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “This recovery is sustainable. Consumers are in the driver’s seat.”
Stock markets in the U.S. were closed today for the Good Friday holiday.
Projections for spending ranged from gains of 0.3% to 0.9%. The January reading was previously reported as an increase of 0.2%.
The Bloomberg survey median called for incomes to rise 0.8%. The gain in February followed a 3.7% drop the prior month that reflected, in part, the 2 percentage-point increase in the payroll tax.
The saving rate increased to 2.6% from 2.2% in January, the lowest since August 2007. Wages and salaries climbed 0.6% after falling 0.6%. Figures for both months were reduced by $15 billion at an annual rate reflecting the impact of the accelerated bonuses paid out last year before tax rates climbed.
Disposable income, or the money left over after taxes, rose 0.7% after adjusting for inflation. It dropped 4% in the prior month.
Adjusting consumer spending for inflation, which renders the figures used to calculate gross domestic product, purchases rose 0.3% for a second month, today’s report showed.
An index of prices tied to spending patterns increased 1.3% from February 2012, the same as in January. The gain in below the Federal Reserve’s goal of keeping inflation around 2%, leaving policy makers room to keep pumping money into financial markets.
The so-called core measure, which excludes food and fuel costs, rose 0.1% from the prior month, and was also up 1.3% from February 2012.
The economy grew at a 0.4% annual rate in the fourth quarter, following a 3.1% pace in the third quarter, revised figures showed yesterday. The fourth-quarter slowdown was due to the biggest slump in military spending since 1972 and slower inventory building. Consumer purchases rose at a 1.8% rate, revised down from a prior estimate of 2.1%.
Economic growth will move up to a 2% rate in the first quarter, according to the median estimate of 73 economists surveyed by Bloomberg from March 8 to March 13.
Incomes are being buoyed by payroll growth. Employers added a net 236,000 workers in February after a 119,000 increase the prior month. Average hourly earnings climbed 2.1% from February 2012, matching the year-over-year gains in the previous two months as the strongest since March 2012.
Williams-Sonoma Inc. is among retailers enjoying a pickup in sales. Same-store purchases at the San Francisco-based company’s West Elm home-goods chain increased 19% in the fiscal fourth quarter, while sales at Pottery Barn Kids advanced 7.7%.
Some merchants are forecasting the pace of sales will be sustained. Macy’s Inc., the second-largest U.S. department-store chain, projects sales at stores open at least a year will rise 3.5% this year, after growing 3.7% in 2012.
“From a macro perspective, we think the customer is okay, not particularly strong, not particularly weak,” Karen Hoguet, chief financial officer at Macy’s, said at a March 14 conference. “We look at the momentum we have coming in to the year and we feel quite confident.” At the same time, “that doesn’t mean that we’re not cognizant of all that’s going on in Washington and what’s gone on with the payroll tax and every other factor,” she said.
Spending on big-ticket items like automobiles is also growing as households replace older vehicles and take advantage of low borrowing costs. Cars and light trucks sold at a 15.3 million annual rate in February after a 15.2 million pace the prior month, Ward’s Automotive Group data showed.
Rising stock prices and a recovering housing market are helping boost household finances. The Standard & Poor’s 500 Index closed at a record high of 1,569.19 yesterday. The S&P/Case-Shiller of property values in 20 U.S. cities jumped 8.1% in the 12 months to January, the biggest year-to-year gain since June 2006.
Even so, Americans’ moods are looking less upbeat. The Bloomberg Consumer Comfort Index fell last week for a second consecutive time to the lowest level since mid February.