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The Commerce Department Monday said Americans spent more in March and their income grew, the latest indication that consumers are shrugging off a tax increase. Spending on services drove the 0.2 percent increase. One reason services were higher: Americans paid more to heat their homes during a unseasonably cold March. (A shopper talks on the phone after leaving Macy's department store in Herald Square on December 26, 2012 in New York City.Photo by Andrew Burton/Getty Images)
Americans spent more in March and their income grew, the latest indication that consumers are shrugging off a tax increase.
The Commerce Department says consumer spending increased 0.2 percent in March. That followed a 0.7 percent jump the previous month and a 0.3 percent gain in January.
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.
Income increased 0.2 percent last month, following a gain of 1.1 percent in February. After-tax income also rose 0.2 percent.
"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 tax-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.
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. But the U.S. hasn't been able to maintain that pace since the recession ended nearly four years ago. And in today's still-struggling recovery, with unemployment at 7.6 percent, the economy needs faster growth to generate enough jobs to quickly shrink unemployment.
Since the Great Recession officially ended in June 2009, growth has remained weaker than usual after a severe downturn. The economy expanded just 2.4 percent in 2010, 1.8 percent in 2011 and 2.2 percent in 2012.