Personal income and consumer spending increased in February by more than economists expected, adding to consumers’ confidence that wavered in the recent months amid tax hikes and automatic spending cuts.
Personal income increased $143.2 billion, or 1.1 percent, almost half a percentage point more than predicted, after tumbling by 3.7 percent in January, the Commerce Department said Friday. Consumer spending increased 0.7 percent in February, the biggest gain in five months.
The increases are higher than many economists expected.
“The consumer is doing well this quarter,” said Ryan Sweet, senior economist at Moody’s Analytics. “As they see the stock prices going up and unemployment going down, those who have a job will go out and spend more,” he added.
Unemployment dropped to 7.7 percent in February, its lowest point in four years. Stock markets are reaching new highs, and the housing market is showing slow but steady recovery. These are all good signs for the economy, as consumer spending accounts for 70 percent of the overall economic activity in the U.S.
Americans spent more even though they paid more in taxes because a payroll tax holiday expired. The end of a 2 percent payroll tax holiday and an increase in taxes for the households making more than $450,000 a year also made the January figures look extremely bad.
The increase in personal income and spending means that the economy is gaining momentum at the beginning of this year after contracting in the last quarter of 2012.
This doesn’t necessarily mean American consumers became richer, but many of them have started feeling so.
“What we see is a wealth effect,” said Sheyna Steiner, senior investing analyst at Bankrate.com. “When the value of their houses increases and the unemployment goes down, this adds to their feeling of security: people feel that the economy became better overall and their personal situation improved,” she added.
Shannon Daniels, a sales assistant from Brooklyn, said she held on her wallet tighter in December and January because she was uncertain how much she would pay in taxes when the payroll holiday expired.
“I got my paycheck in January and I was shocked – it was way, way lower than I expected,” she said as she pulled a cart full of clothes and hair accessories to a register in Target.
“Then I got my February paycheck and I was like, OK, I still have some cash to spend on what I really want.”
Bigger paychecks in February helped Americans spend more. The savings rate increased to 2.6 percent of income after taxes, compared with 2.2 percent in January.
While economists seem optimistic about the further economic growth, many say consumers may cut back on spending in the second quarter of 2013. Many Americans simply haven’t yet noticed the tax hike. While middle-class consumers won’t pay attention to the 2 percent tax increase, those earning the least, after getting smaller salaries for several consecutive months, might get more tightfisted with their cash.
“I think in the summer consumers will be a little bit more frugal,” said Sweet, adding that in a couple of months people might respond to the increase “by cutting back on spending here and there.”
Danny Rice, a 29-year-old engineer from New York, said he was going to cut back on eating out. He said he didn’t complain about his salary, but he had to partly support his girlfriend because she was laid off three months ago and couldn’t get a job.
Even after helping his girlfriend, Rice could buy everything he needed, but after seeing his last two paychecks shrink, he decided to cut back on some guilty pleasures like eating out in an Italian restaurant every other week.
“It never hurts to dine out one less time a month,” he said, adding, “My girlfriend finally has a chance to teach me how to cook.”