Which raised a worrisome question: Would consumers stop spending and further slow the economy? Nope. Not yet, anyway.
The latest government figures show consumers spent 3.2 percent more on an annual basis in the January-March quarter than in the previous quarter the biggest jump in two years.
The government reports consumers increased their spending in each month, by 0.2 percent in March, 0.7 percent in February and 0.3 percent in January.
The spending increases highlighted a broader improvement in Americans financial health that is blunting the impact of the tax increase and raising hopes for more sustainable growth.
Consumers have shed debt. Gasoline has gotten cheaper. Rising home values and record stock prices have restored household wealth to its prerecession high. And employers are steadily adding jobs, which means more people have money to spend.
No one should write off the consumer simply because of the 2 percentage-point increase in payroll taxes, says Bernard Baumohl, chief economist at the Economic Outlook Group. Overall, household finances are in the best shape in more than five years.
Spending weakened toward the end of the January-March quarter. Spending at retailers fell in March by 0.4 percent, the worst showing in nine months.
And more spending on utilities accounted for up to one-fourth of the increase in consumer spending in the January-March quarter, according to JPMorgan Chase economist Michael Feroli, because of colder weather.
Higher spending on utilities isnt a barometer of consumer confidence the way spending on household goods, such as new appliances or furniture, would be.
Americans also saved less in the first quarter, lowering the savings rate to 2.6 percent from 3.9 percent in 2012.
Economists say that likely was a temporary response to the higher Social Security tax, and most expect the savings rate to rise back toward last years level. That could limit spending.
New threats to consumers have emerged. Across-the-board government spending cuts kicked in March 1. The spending cuts have triggered government furloughs and could lead private companies that do business with the government to cut staff. And the cuts are expected to shave a half-point from economic growth this year.
Even so, most economists are relieved that consumers have proved so resilient so far.
Its very encouraging that consumers and thus the broader economy have been able to weather that storm as well as they have, says Mark Zandi, an economist at Moodys Analytics.
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