WASHINGTON (AP) — Consumers earned more and spent more in February, helped by a stronger job market that is offsetting some of the drag from higher taxes.
The Commerce Department said Friday that consumer spending rose 0.7 percent in February from January. It was the biggest gain in five months and followed a revised 0.4 percent rise in January, which was double the initial estimate.
Americans were able to spend more because their income rose 1.1 percent last month. That followed January’s 3.7 percent plunge and December’s 2.6 percent surge. The huge swings reflected a rush to pay bonuses and dividends in December before taxes increased.
After-tax income also increased 1.1 percent last month. That allowed consumers to put a little more away. The saving rate increased to 2.6 percent of after-tax income, up from 2.2 percent in January.
The gains in spending and income follow other signs of an economy gathering momentum. Hiring is up, businesses are spending more, the stock market is hitting record levels and the housing recovery is strengthening.
More spending by consumers should boost economic growth in the January-March quarter after a lull at the end of last year. Consumer spending accounts for 70 percent of economic activity.
Jennifer Lee, senior economist at BMO Capital Markets, said the increases suggest consumer spending could be growing in the first quarter at an annual rate of more than 3 percent. That would be the fastest gain in more than three years and more than double the 1.3 percent rate in the fourth quarter.
“More encouraging news on the U.S. economy,” Lee said in a note to clients. “Always welcomed but especially now with weakness elsewhere in the world.”
Most economists predict the economy is growing at an annual rate of roughly 2.5 percent in the January-March quarter. That would be a vast improvement from the 0.4 percent growth rate in the October-December quarter, which was held back by slower company stockpiling and the sharpest defense cuts in 40 years.
Inflation, as measured by a gauge tied to consumer spending, increased 1.3 percent in February compared with a year ago. That’s well below the Federal Reserve’s 2 percent target, giving the central bank room to keep stimulating the economy without having to worry about price pressures.
Consumers spent more at the start of the year even after paying higher taxes. An increase in Social Security taxes has reduced take-home pay for nearly all Americans receiving a paycheck. And income taxes have risen on the highest earners. The tax increases both took effect on Jan. 1.
One reason the tax increases haven’t slowed the economy is companies have accelerated hiring and are slowly but steadily increasing wages.
Employers have added an average of 200,000 jobs a month since November. That helped lowered the unemployment rate in February to a four-year low of 7.7 percent. Economists expect similar strong job gains in March.
Businesses are also investing more in equipment and machinery, which has given factories a lift after a disappointing 2012.
And the housing recovery that began last year appears to be sustainable. In February, sales of previously occupied homes rose to the highest level in more than three years. The gains have helped lift home prices, which have made Americans feel wealthier.
Stock prices have also surged. On Thursday, the Standard & Poor’s 500 index closed at a record high of 1,569. That surpassed the previous record of 1,565 set in October 2007, a year before the peak of the financial crisis.
Three weeks ago, the Dow Jones industrial average beat its 2007 record.
Markets are closed Friday for the Good Friday holiday.