WASHINGTON — US consumers earned more and spent more in February, helped by a stronger job market that has offset some of the drag from higher taxes.
The Commerce Department said on Friday that consumer spending rose 0.7% in February from January. It was the biggest gain in five months and followed a revised 0.4% rise in January, which was double the initial estimate.
Americans were able to spend more because their incomes rose 1.1% last month. That followed January's 3.7% plunge and December's 2.6% surge. The huge swings reflected a rush to pay bonuses and dividends in December before taxes increased.
After-tax income increased 1.1% last month.
The jump in income allowed consumers to put a little more away in February. The saving rate increased to 2.6% of after-tax income, up from 2.2% in January.
Consumers spent more at the start of the year even after paying higher taxes. An increase in Social Security taxes has reduced take-home pay for nearly all Americans receiving a paycheque. And income taxes have risen on the highest earners. The tax increases both took effect on Jan 1.
The jump in spending and income suggests economic growth strengthened at the start of the year after nearly stalling at the end of last year. Consumer spending accounts for 70% of US economic activity.
Most economists estimated the economy grew at an annual rate of roughly 2.5% in the January-March quarter. That would be a vast improvement from the 0.4% growth rate in the October-December quarter, which was held back by slower company stockpiling and the sharpest defense cuts in 40 years.
Inflation increased 1.3% in February compared with a year ago. That's well below the Federal Reserve's 2% target, giving the central bank room to keep stimulating the economy without having to worry about price pressures.
One reason the tax increases haven't slowed the economy is companies have accelerated hiring and are slowly but steadily increasing wages.
Employers have added an average of 200,000 jobs a month since November. That helped lowered the unemployment rate in February to a four-year low of 7.7%. Economists expect similar strong job gains in March.
Most other signs point to an economy that is gaining momentum. Businesses are investing more in equipment and machinery, which has given factories a lift after a disappointing 2012.
And the housing recovery appears to be strengthening. In February, sales of previously occupied homes rose to the highest level in more than three years. The gains have helped lift home prices, which have made Americans feel wealthier.
Stock prices have also surged. On Thursday, the Standard & Poor's 500 index closed at a record high of 1,569. That surpassed the previous record of 1,565 set in October 2007, a year before the peak of the financial crisis.
Markets are closed Friday for the Good Friday holiday.