WASHINGTON – Americans kept increasing their spending in March and their income grew, further indication that consumers are shaking off higher taxes.
The Commerce Department said Monday consumer spending rose 0.2 percent in March from February. That followed a 0.7 percent jump in February and a 0.3 percent gain in January.
Income increased 0.2 percent last month, following a gain of 1.1 percent in February. After-tax income also rose 0.2 percent.
Higher income has helped offset an increase in Social Security taxes that took effect on Jan. 1. On Friday, the government said consumer spending rose from January through March at the fastest pace in more than two years.
“The consumer is doing reasonably well,” Joseph LaVorgna, an economist at Deutsche Bank, said in a note to clients.
Spending on services drove the March increase. That was partly due to an unseasonably cold March, which required Americans to pay more to heat their homes.
Higher spending on utilities does not signal consumer confidence the way purchases on household goods, such as new appliances or furniture, typically do. And other reports suggest consumers may be starting to feel the impact of the tax increase. Sales at retail stores and restaurants fell in March by the most in nine months.
The 2 percentage point tax increase has reduced take-home pay for nearly all Americans. A person earning 50,000 a year will have about $1,000 less to spend this year. A household with two highly paid workers will have up to $4,500 less. That may slow consumer spending and economic growth in the April-June quarter. Consumer spending accounts for about 70 percent of economic activity.
Other trends may offset some of the impact of the taxes this year. Consumers have cut their debts and rising home values and stock prices have increased household wealth.
In addition, gasoline has become cheaper. The national average price for a gallon of gas has fallen by 29 cents since Feb. 27 to $3.50. A decline in gas prices leaves consumers with more money to spend on other things.
Consumer spending was actually stronger in March after adjusting for the drop in gas prices. Inflation-adjusted spending rose at a slightly faster 0.3 percent pace. That matched February’s inflation-adjusted rate and was higher than January’s.
Steady hiring has helped consumers maintain spending, though job gains slowed in March. Employers added just 88,000 jobs last month, much lower than the average of 220,000 per month in the preceding four months.
Economists forecast that the slowdown was temporary. They predict job gains in April rebounded to 160,000, although the unemployment rate is expected to stay at 7.6 percent. The Labor Department will issue the April employment report on Friday.
On Friday, the Commerce Department said the economy expanded 2.5 percent at an annual rate in the January-March quarter. That was much better than the 0.4 percent growth recorded in the fourth quarter. Growth was buoyed by the large increase in consumer spending.
In a healthy economy, with an unemployment rate between 5 percent and 6 percent, GDP growth of 2.5 percent or 3 percent would be considered solid.