WASHINGTON — U.S. consumers boosted their spending in February by the most in seven months, raising expectations for stronger growth at the start of the year.
Americans spent more even as their income barely grew. To make up the difference, many saved less.
Consumer spending rose 0.8 percent last month, the Commerce Department said Friday. The biggest increase since July coincided with the best three-month hiring stretch in two years.
The jump in consumer spending helped Wall Street close out its best first quarter since 1998. More spending also led economists to upwardly revise their economic growth estimates for the January-March quarter.
Paul Dales, an economist at Capital Economics, now expects annual growth for the first quarter to be around 2.5 percent, compared with earlier estimates of about 2 percent. Consumer spending drives roughly 70 percent of economic activity.
Some of the higher spending last month reflected surging gas prices. But consumers spent more on other goods and services, too. After excluding inflation, which was due mainly to gas prices, spending rose a solid 0.5 percent.
Many Americans are spending more freely after the economy added an average of 245,000 jobs a month from December through February. That's lowered the unemployment rate to 8.3 percent, the lowest in three years. Most economists expect similar job growth in March.
Still, the hiring gains have not resulted in bigger paychecks for most people. Income grew just 0.2 percent last month, matching January's weak increase. And when taking inflation into account, income after taxes fell for a second straight month.
Most consumers spent more of what they earned. The saving rate dropped to 3.7 percent of after-tax income in February. That was the lowest level since August 2009 and a full percentage point lower than all of last year.
Americans are also taking on more debt. Consumer borrowing increased from November through January by the most in a decade for a three-month period. Yet the increases were driven almost entirely by auto and student loans. Credit card debt decreased in January and remains well below pre-recession levels.
Dales cautioned that at some point, consumers won't be able to draw further on their savings. Further job gains are needed to boost consumers' income.
Many people are more confident in the economy, despite stagnant wages and higher gas prices. The University of Michigan Consumer Sentiment Survey index rose this month to 76.2 – its highest level since February 2011.
"Consumer confidence is being driven by the improvement in the labor market," said Joel Naroff, chief economist at Naroff Economic Advisors.
So far, more robust hiring has yet to lift growth. The economy grew at an annual rate of 3 percent in the October-December quarter and most analysts expect that pace slowed in the January-March quarter.
Economists expect growth to rebound later this year as further hiring lifts the economy. The spending increase in February follows other data showing that may already be under way.
Americans stepped up spending on retail goods in February, the government said earlier in the month. Consumers bought more autos, clothes and appliances. They also paid higher prices for gas.
On Friday, the national average price for a gallon of gas was $3.92, according to AAA. In 11 states, the price is more than $4 per gallon.
Higher gas prices could eventually slow growth by causing some people to cut spending on other goods, from appliances and furniture to electronics and vacations. Gasoline purchases provide less benefit for the U.S. economy because about half of the revenue flows to oil-exporting nations, though U.S. oil companies and gasoline retailers also benefit.
"The bad news is that pump prices will start approaching the $4.15 - $4.20 per gallon range by Memorial Day," said Chris G. Christopher Jr., senior economist at IHS Global Insight. "The good news is that a relatively stronger job and stock market are assisting in holding up consumer spending and confidence."
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By MARTIN CRUTSINGER 03/30/12 04:41 PM ET