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TheStreet Open House

US Consumer Spending, Income Jump In February

"We're now likely to see the fastest quarterly gain in real consumption in two years," he said.

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.

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.

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