U.S. consumer spending increased by the most in seven months in February as households shook off a rise in gasoline prices, leading economists to raise forecasts for first-quarter growth.
Even with gasoline around $4 a gallon, Americans were more optimistic about the economy's prospects this month than at any other time over the past year, drawing solace from a firming labor market.
The Commerce Department said on Friday that consumer spending rose 0.8 percent in February as demand for long-lasting goods, like automobiles, rose sharply. It also said spending in January was double the previously reported 0.2 percent gain.
Separately, the Thomson Reuters/University of Michigan's final March reading for the overall consumer sentiment index rose to 76.2, the highest level since February 2011, from 75.3 in February.
Fears that the economy was going to slow substantially this quarter were overdone. The economy is doing fairly well, given the headwinds from Europe, rising gasoline prices, said Ryan Sweet, a senior economist at Moody's Analytics in West Chester Pennsylvania.
U.S. stocks rose on the spending and sentiment reports, which were both stronger than expected, while U.S. Treasury debt prices were little changed. The dollar fell against a basket of major currencies.
With confidence holding up, consumer spending should remain supported in the first half of the year and soften the impact of cooling factory activity on the economy, analysts said.
FIRST-QUARTER GDP FORECASTS RAISED
When adjusted for inflation, spending advanced 0.5 percent, the largest gain since September.
That prompted several economists, including those at Goldman Sachs to raise their first-quarter GDP forecasts. Goldman Sachs now expects GDP to rise at a 2.3 percent annual rate in the first quarter, up from 2 percent.
The economy expanded at a 3 percent pace in the final three months of 2011 as it got a boost from restocking by businesses, but the inventory buildup has likely pretty much run its course and is not expected to help this quarter.
The growth in factory activity in the U.S. Midwest slowed in March, another report showed on Friday, with employment and new orders pulling back from recent lofty levels.
The Institute for Supply Management-Chicago's business barometer slipped to 62.2 from 64.0 in February. A reading above 50 indicates expansion in the regional economy.
Last month's increase in consumer spending suggested households were taking surging gasoline prices in stride. Prices at the pump averaged $3.97 a gallon in the week to Monday and have risen 62 cents since the start of the year.
Earlier this week, Wal-Mart Stores said U.S. sales in the last two months had withstood rising gas prices and a tough economy that worried many of its shoppers.
Economists said the pain at the pump was being mitigated by falling natural gas prices, which have been depressed by abnormally warm weather that has curbed demand for heating.
A modest 0.2 percent rise in income helped cover some of the rise in spending last month, but consumers also saved less. The saving rate, the amount of disposable income socked away, dropped to 3.7 percent, the lowest rate since August 2009.
Disposable income, that amount left after taxes and inflation, declined for a second straight month, a worrying trend that could eventually put the brakes on spending.
While households want to spend and will raid their bank accounts to support that habit, unless income gains start improving, consumption will have to slow, said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.
Spending on goods meant to last three years or more rose 1.6 percent after advancing 1.4 percent the prior month, a reflection of a pickup in auto sales, which reached their highest level in four years in February.
Spending on services, which accounts for about two thirds of consumption, notched its strongest gain in nearly two years.
Despite rising gasoline costs, inflation was largely contained.
A price index for personal spending rose 0.3 percent in February after increasing 0.2 percent the prior month. In the 12 months through February, the so-called PCE price index was up 2.3 percent. It increased 2.4 percent in January.
A core inflation measure, which strips out food and energy costs, edged up 0.1 percent after rising 0.2 percent in January. In the 12 months through February, core prices rose 1.9 percent, the same as in January.
(Reporting By Lucia Mutikani; Editing by Neil Stempleman)