Consumer Spending in U.S. Climbs by Most in Five Months

Consumer spending climbed in February by the most in five months and confidence unexpectedly improved in March, showing job-market gains are helping Americans overcome tax increases and concern about federal budget cuts.

Purchases, which account for about 70 percent of the economy, rose 0.7 percent after a 0.4 percent advance the prior month that was bigger than previously estimated, according to Commerce Department data today in Washington. Another report showed consumer sentiment advanced to a four-month high.

Record stock prices and rising home values combined with gains in wages are helping households repair finances left in shreds by the recession, making it easier to cope with a two percentage-point increase in the payroll tax. The pickup in spending at retailers including Macy’s Inc. is giving the world’s largest economy a boost just as efforts to narrow the budget deficit prompt government cutbacks.

“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. “There are no signs in the data that the expiration of the payroll-tax cut is affecting consumers whatsoever. This recovery is sustainable.”

Stock markets in the U.S. were closed today for the Good Friday holiday.

Consumer confidence climbed this month as Americans grew more optimistic about the outlook for the economy. The Thomson Reuters/University of Michigan’s final March sentiment index rose to 78.6, exceeding all estimates in a Bloomberg survey, from 77.6 in February.

Record Revision

The 6.8-point revision from a preliminary March reading of 71.8, released two weeks ago, was the largest on record, according to economists at JPMorgan Chase and Co. and Barclays Plc in New York. Economists projected a final reading of 72.6, according to the Bloomberg survey median.

“Consumers discounted the administration’s warning about economic catastrophe following the cuts in federal spending, and consumers have renewed their expectations that job gains will accelerate in the months ahead,” Richard Curtin, the sentiment survey’s chief economist, said in a statement.

The gauge of expectations six months from now, which more closely projects the direction of consumer spending, also advanced to a four-month high. The group’s index of current conditions, which measures whether Americans think it’s a good time to make big investments and gauges consumers’ views of their personal finances, matched November as the strongest reading since January 2008.

Last month’s increase in consumer spending beat the median forecast of a 0.6 percent rise in a Bloomberg survey of 78 economists.

Department Stores

Some merchants are projecting the pace of sales will be sustained. Macy’s, the second-largest U.S. department-store chain, said sales at stores open at least a year will rise 3.5 percent this year, after growing 3.7 percent in 2012.

“We think the customer is OK, not particularly strong, not particularly weak,” Karen Hoguet, chief financial officer at Cincinnati, Ohio-based Macy’s, said at a March 14 conference. “We look at the momentum we have coming into 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,” she said.

Figures today from the Labor Department showed payrolls climbed in 42 states in February, while the jobless rate dropped in 22. Texas led with an 80,600 hiring increase, the biggest in data going back to 1982, followed by California with 41,200. Rhode Island, Vermont, California and New Jersey showed the biggest declines in unemployment rates.

Personal Income

The Commerce Department’s report showed incomes increased 1.1 percent, exceeding the 0.8 percent advance projected by economists surveyed. The gain in February followed a 3.7 percent drop the prior month that reflected, in part, the higher payroll tax rate.

The saving rate increased to 2.6 percent from 2.2 percent in January, which was the lowest since August 2007. Wages and salaries climbed 0.6 percent after falling 0.6 percent. 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 percent after adjusting for inflation. It dropped 4 percent in the prior month.

Adjusting consumer spending for inflation, which renders the figures used to calculate gross domestic product, purchases rose 0.3 percent for a second month, today’s report showed.

An index of prices tied to spending patterns increased 1.3 percent from February 2012, the same as in January. The gain is below the Federal Reserve’s goal of keeping inflation around 2 percent, leaving policy makers room to keep pumping money into financial markets to spur growth and reduce unemployment.

Core Inflation

The so-called core measure, which excludes food and fuel costs, rose 0.1 percent from the prior month, and was also up 1.3 percent from February 2012.

The economy grew at a 0.4 percent annual rate in the fourth quarter, following a 3.1 percent gain in the previous three months, 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 percent rate, revised down from a prior estimate of 2.1 percent.

Economic growth will move up to a 2 percent 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 percent from February 2012, matching the year-over-year gains in the previous two months as the strongest since March 2012.

Retail Sales

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 percent in the fiscal fourth quarter, while sales at Pottery Barn Kids advanced 7.7 percent.

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 percent in the 12 months to January, the biggest year-to-year gain since June 2006.