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U.S. consumers lift spending, but sentiment slips

A J.Crew store is seen in Manhattan, New York March 3, 2014. REUTERS/Mike Segar
A J.Crew store is seen in Manhattan, New York March 3, 2014. REUTERS/Mike Segar

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. consumers stepped up spending a bit in February as incomes increased for a second straight month, offering hope the economy was regaining its footing after being slammed by an unusually cold winter.

The data from the Commerce Department on Friday took the sting out of a separate report that showed consumer sentiment dipped in March. Economists said they expected household morale to perk up with warmer weather in the spring.

"So the winter may have slowed things temporarily, but with consumers still spending and incomes rising, we should see solid growth in the months ahead," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.

Consumer spending rose 0.3 percent last month after a downwardly revised gain of 0.2 percent in January.

Separately, the Thomson Reuters/University of Michigan's consumer sentiment index dipped to 80.0 in March from 81.6 in February. It was little changed from a preliminary reading earlier this month.

A combination of bad weather, an effort by business to work off bloated inventories, the expiration of long-term unemployment benefits and cuts to food stamps is expected to hold back growth to around a 1.5 percent annual pace in the first quarter.

But a rebound is expected as those factors fade. The economy grew at a 2.6 percent rate in the fourth quarter.

U.S. financial markets were little moved by the data as investors digested remarks by Chinese Premier Li Keqiang that his government was ready to support China's cooling economy.

SERVICES SPENDING UP

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, was bolstered by a rise in outlays for services, likely because of higher demand for health care and utilities.

When adjusted for inflation, spending rose 0.2 percent, but January's gain was just 0.1 percent, not the more-robust 0.3 percent increase reported a month ago.

The revision suggested spending cooled this quarter after logging its fastest pace in three years in the final three months of 2013.

Goldman Sachs lowered its first-quarter GDP growth estimate by one-tenth to a 1.5 percent rate, while forecasting firm Macroeconomics Advisers cut its forecast by two-tenths to a 1.3 percent pace.

"With the downward revision to real spending in January, the contribution from consumption is likely to be more modest than previously thought," said Millan Mulraine, deputy chief economist at TD Securities in New York.

Income rose 0.3 percent last month after rising by the same margin in January. It continues to be supported by government transfers for healthcare payments, which offset the drag from the expiration of the long-term unemployment benefits.

The saving rate, which is the percentage of disposable income households are socking away, rose to 4.3 percent from 4.2 percent in January.

There was little sign of inflation.

A price index edged up 0.1 percent for a second straight month, and was up just 0.9 percent from a year ago. That marked a slowdown from January's 1.2 percent year-on-year advance and was the smallest 12-month gain since October.

Excluding food and energy, prices rose just 0.1 percent for an eighth straight month, keeping the 12-month gain capped at 1.1 percent, the same as in January.

Both measures remain stuck well below the Federal Reserve's 2 percent target, providing ample scope for the central bank to move slowly in raising interest rates. The Fed plans to wrap up a bond-buying program later this year, but it is not expected to move rates higher until sometime in 2015.

"The persistence of extremely weak inflation is cause for concern and will continue to be a focus of the Fed," said Diane Swonk, chief economist at Mesirow Financial in Chicago.

(Reporting by Lucia Mutikani; Additional reporting by Ryan Vlastelica; Editing by Tim Ahmann and Paul Simao)

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