Consumer Spending Surprisingly Robust In February

Consumer spending grew at a surprisingly strong pace last month, another encouraging sign that the economy may be gaining momentum, despite the hit from higher taxes and gas prices and fears of government spending cuts.

Retail sales rose 1.1 percent in February from the prior month, seasonally adjusted, thanks in large part to robust gains for cars and building materials, and purchases at internet stores, the Commerce Department reported Wednesday. The overall sales rate increase was the biggest in five months, and about double what many analysts had forecast.

Consumers did feel the pinch from higher fuel prices. Sales at gasoline stations jumped 5 percent last month from January, a big factor in overall retail sales growth. Even so, after excluding consumer spending for gas and for cars, “core” retail sales still showed an increase.

Taken together, the report suggests stronger underlying confidence and willingness to spend on the part of consumers, most likely reflecting rising stock prices, a recovering housing market and recent gains in employment and earnings.

Car and home sales are benefiting from pent-up demand as well as low interest rates, and that’s supporting business at other retailers. Sales at building material and garden supply stores rose 1.1 percent in February from the prior month.

There were indications that consumers are reacting to the expiration of the payroll tax holiday at the start of this year, which cut workers’ take-home pay by 2 percent. Consumers ate out less, knocking restaurant and drinking-establishment sales by 0.7 percent last month. Grocery and other food and beverage stores, meanwhile, saw a strong 0.8 percent sales gain last month.

Other discretionary purchases also took a hit last month. Sales at sporting goods and hobby stores, including music shops, dropped 0.9 percent. And furniture and home furnishing dealers had a tough month, as sales fell 1.6 percent.

Yet on the whole, the report raised some analysts’ hopes that consumer spending will outperform expectations this year. “The recent pick-up in both employment and earnings growth bodes well for consumption growth later in the year, too,” said Paul Dales, an analyst at Capital Economics.

Other economists remained cautious in the face of a new round of government spending cuts that started in March.

“The key to where spending is headed this spring and summer is whether the momentum from the housing market can deliver impetus to consumer spending power and sentiment to offset the negative drag from budget cuts,” said Kathy Bostjancic, an economist at the Conference Board.