By MARTIN CRUTSINGER
WASHINGTON (AP) â¿¿ U.S. consumers stepped up spending in February after their income jumped, aided by a stronger job market that offset some of the drag from higher taxes. The gains led economists to predict stronger economic growth at the start of the year.
Consumer spending rose 0.7 percent in February from January, the Commerce Department said Friday. 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 huge swings in the previous two months, which reflected a rush to pay bonuses and dividends in December before taxes increased.
After-tax income also increased 1.1 percent last month, allowing 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.
After seeing Friday's report on consumer spending, Paul Ashworth, chief U.S. economist at Capital Economics, raised his growth forecast for the first quarter by a full percentage point. Ashworth now expects growth in the January-march quarter increase to an annual rate of 3 percent.
Growth at that pace would be a vast improvement from the 0.4 percent rate in the October-December quarter, which was held back by slower company stockpiling and the sharpest defense cuts in 40 years.
Ashworth called the boost in spending "impressive," noting that consumers spent more while having to adjust to the higher Social Security taxes and a spike in gasoline prices.