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U.S. consumer spending slowed in March

WASHINGTON Americans spent more last month and their income grew, the latest indication that tax increases have yet to hold back the consumer.

The Commerce Department said Monday that consumer increased their spending 0.2 percent in March from February. That followed a 0.7 percent jump in February and a 0.3 percent gain in January.

"The pickup was despite the payroll tax hike, although we doubt Q2 will be nearly that strong, with some of the recent strength coming from a lower saving rate," said Jim O'Sullivan, chief U.S. economist with High Frequency Economics, in a note.

Income increased 0.2 percent last month, following a gain of 1.1 percent in February. After-tax income also rose 0.2 percent.

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.

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.

Still, 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.

"Looking ahead, much depends on whether the slowdown in employment growth is maintained," said Paul Dales, senior U.S. economist with Capital Economics, in a research note. "But the recent sharp fall in the gasoline price will boost real incomes. If real spending were to rise by 0.2 percent month over month in each month in the second quarter, annualized real consumption would increase by 2.9 percent. That would be only a touch weaker than the first quarter's 3.2 percent gain."

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.