Consumer spending edged up a tiny 0.1 per cent following declines of 0.2 per cent in both January and December, the Commerce Department reported Monday. The result reflected a 0.4 per cent increase in nondurable goods such as food and energy coupled with a 0.1 per cent fall in durable goods such as automobiles.
Income grew a solid 0.4 per cent in February, matching January's rise. With income growing faster than spending, the saving rate jumped to 5.8 per cent of after-tax income — the highest level since December 2012.
Economists said the rise in the saving rate reflects in part the big drop in recent months in gas prices, which acts like a tax cut that leaves more money in consumers' pockets. Falling gas prices and continued employment growth set the stage for stronger consumer spending in the months ahead as the weather improves.
"Households are still flush with the money saved from the big drop-off in gasoline prices and, with the labour market still on fire, incomes should continue to increase at a solid pace," said Paul Ashworth, chief U.S. economist at Capital Economics. "That provides the scope for a big gain in consumption in the second quarter."
Severe winter weather kept shoppers away from the malls and auto showrooms in both January and February.
An earlier report showed retail sales fell in February for a third straight month as Americans cut back on car buying by the most in more than a year. Sales also fell at restaurants, home improvement centres and electronics and appliance stores. Harsh winter weather in much of the country was blamed for the decline.
The weather-related weakness is expected to dampen overall economic growth during the January-March quarter, with many economists forecasting growth to slow to around 1.5 per cent during the quarter. But analysts are also optimistic for a rebound in coming quarters to growth of 3 per cent or better.
If the economy does hit 3 per cent growth this year, it would be the fastest pace for the economy in a decade.
Robust employment gains of the past year should continue this year, and the stronger job market will likely lead to rising household incomes and more consumer spending.
Federal Reserve Chair Janet Yellen said Friday an increase in the Fed's key interest rate could come later this year. Any rate hikes, however, will likely be very gradual.
Many economists believe that with inflation still running below the Fed's target of 2 per cent, the Fed will be cautious in raising rates and hold off on the first rate hike until September. The Fed's target for short-term rates has been at a record low near zero since December 2008.
The new report on consumer spending, which accounts for 70 per cent of economic activity, showed that an inflation gauge tied to consumer spending patterns rose 0.2 per cent in February after three months of declines. Excluding food and energy, this inflation gauge was up 0.1 per cent in February and has risen just 1.4 per cent over the past 12 months, well below the Fed's 2 per cent target.