Consumer spending increased by the most in seven months in February as households shook off a rise in gasoline prices, suggesting the economy may not have slowed as much this quarter as economists had thought.

There is little sign that gasoline prices, which have jumped 62 cents since the start of the year are dampening spirits among Americans as the labor market strengthens.

Consumer confidence touched its highest level in more than a year in March amid optimism over jobs and income. That should help to keep spending supported this quarter and soften the impact of cooling factory activity on the economy.

So long as the consumer is spending, that's the biggie everyone is watching as they drive the economy. The economy is on a decent trajectory, but maybe not as strong as some would like, said Wayne Kaufman, chief market analyst at John Thomas Financial in New York.

The Commerce Department said on Friday consumer spending rose 0.8 percent as spending on long lasting goods, like automobiles, rose sharply. January's spending was revised up to 0.4 percent from a 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 since February 2011, from 75.3 in February. The final March figure rose from a preliminary reading of 74.3 and was above economists' forecast for 74.7.

U.S. stocks rose on the data, while U.S. Treasury debt prices were little changed. The dollar fell against a basket of major currencies.

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Instant view on spending, income: [ID:nL2E8EU2VT]

Instant view on Chicago PMI, sentiment: [ID:nL2E8EU4I5]

Story on the consumer confidence survey: [ID:nL2E8EU4SE]

Graphic-consumer spending: http://link.reuters.com/vem47s

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FIRST-QUARTER GDP FORECASTS RAISED

Economists polled by Reuters had expected spending, which accounts for two-thirds of U.S. economic activity, to rise 0.6 percent last month.

When adjusted for inflation, spending rose 0.5 percent, the largest gain since September, after gaining 0.2 percent in January. That caused economists at Goldman Sachs to raise their first-quarter GDP forecast to 2.3 percent from 2 percent.

The economy expanded at an annual rate of 3 percent in the final three months of 2011 as it got a boost from restocking by businesses, but the inventory build up has likely pretty much run its course and is not expected to help this quarter.

But growth will still be held back also as factory activity cools. Manufacturing activity in the U.S. Midwest slowed in March, with employment and new orders pulling back from recent lofty levels, a third report showed.

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.

Chicago is more sensitive to export weakness than the national index and given what's going on in Europe and Asia I think it's remarkable that the number is where it is, said Christopher Low, chief economist at FTN Financial in New York.

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.

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.

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, what is left after taxes and inflation, declined for a second straight month.

Spending on goods meant to last three years or more rose 1.6 percent after advancing 1.4 percent the prior month. Auto sales reached their highest level in four years in February.

Spending on services rose 0.4 percent. Unseasonably warm weather had curbed spending on utilities in the prior months.

The report showed mild inflation pressures, which should help to support spending.

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)

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