By Jeffry Bartash, MarketWatch
WASHINGTON (MarketWatch) — Consumers lifted spending in February at the fastest rate in five months, though a good chunk of their money went to pay for higher gasoline prices.
Personal spending climbed a seasonally adjusted 0.7% last month, the Commerce Department said Friday. That was a notch higher than the estimate of economists polled by MarketWatch.
The increase in spending in January, what’s more, was revised up to 0.4% from 0.2% in another sign that consumers
The speedy pace of spending in the first two months of the year indicates that first-quarter growth could snap back sharply to the 2.5% to 3% range after a lackluster 0.4% increase in the final three months of 2012.
“Despite the expiry of the payroll tax cut and higher gasoline prices, we’re now likely to see the fastest quarterly gain in real consumption in two years,” said Paul Ashworth, chief U.S. economist at Capital Economics.
Yet the composition of spending also suggests some caution is in order. Virtually all of the increase in spending in February, for example, was devoted to perishable items such as gasoline and food.
Purchases of so-called nondurable goods jumped 1.9%, likely reflecting the sharp spike in prices at the pump. The average national cost of a gallon of regular gas surged 13% in February, according to the Energy Information Administration.
Spending on durable goods was basically flat in February, marking the worst performance since last October. That’s a category that bears watching: consumers usually cut back on the purchase of big-ticket items if they feel any economic stress or the need to rebuild their savings.
While the savings rate edged up to 2.6% from 2.2% in February, it’s still at a five-year low. A 2% increase in payroll taxes at the start of 2013 is one of the reasons Americans are saving less.
Yet spending was still fairly strong last month if perishables such as gasoline are excluded. What helped consumers in February was a 1.1% jump in personal income, the third strong gain in four months. That was largely in line with Wall Street forecasts.
What’s unclear is whether that trend can continue. The increase in disposable income over the past year has barely kept ahead of inflation, leaving Americans little cushion given their low savings rate.
Many economists think consumers could take a break and rebuild their savings, but others point out that households have sharply reduced their debt since the end of the Great Recession. By one measure, household debt is the lowest in more than 30 years.
Consumer spending is critical to the nation’s growth because it represents as much as 70% of the economy. When Americans buy more goods and services, businesses generate higher sales and profits and can afford to hire extra workers. Less spending results in slower economic growth.
Inflation, meanwhile, remains low. The PCE price index climbed 0.4% in February, largely because of higher gasoline prices, but it’s only up 1.3% over the past 12 months and below the Federal Reserve’s target of 2%.
The core rate, which excludes food and energy, edged up a smaller 0.1% and is also up just 1.3% in the past year.