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Economy

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Bloomberg
Consumer confidence jumped more than forecast in February as Americans adjusted to a higher payroll tax and signs of a recovering housing market spurred faith in the future.

Americans take payroll-tax hike in stride

– Consumers and businesses are treating higher payroll taxes and federal spending cuts as just a speed bump for a U.S. economy poised to accelerate later this year.

Americans are saving less and spending more for purchases such as new automobiles, as household net worth climbs with rising home values and stock indexes surging to record highs. Companies are ramping up hiring, adding 246,000 to private payrolls in February. They’re also expanding investment and rebuilding inventories as they put profits accumulated during the recovery to work.

“A lot of things are going the right way,” said Brian Jones, a senior U.S. economist at Société Générale in New York, whose private employment forecast was closest to the February gain among economists surveyed by Bloomberg. “The labor market is picking up momentum. Businesses are seeing demand. More people working means more people will be spending money. To a certain extent, this neutralizes the effects” of higher taxes.

Growth will pick up in the second half of the year as the fallout from the budget cuts dissipates, paving the way for even stronger spending by businesses and consumers, projections from Barclays and JPMorgan Chase show. Gross domestic product will rise at a 2 percent annual average pace in the latter six months of 2013 after a 1.5 percent rate in the first two quarters, said Dean Maki, chief U.S. economist at Barclays.

“The economy is at a point where it can handle the fiscal tightening without screeching to a halt,” said New York-based Maki, who is also a former Federal Reserve board economist. “We’ll see some slowing, certainly, but the economy is not as fragile as it was.”

Even as Congress is forcing Brent Phipps’ employer, the U.S. government, to reduce spending by $85 billion this fiscal year, the 25-year-old paralegal is still going shopping.

Browsing through an aisle of neon green, pink and transparent plastic storage containers at a Target Corp. store in Washington, Phipps, who works for the Justice Department, said the payroll tax increase hasn’t altered his spending habits.

“I didn’t really pay any attention to it,” he said. “I can’t say I had any particular, ‘Oh no, I’m not going to do X, Y and Z thing’.”

Americans are opening their wallets for bigger-ticket purchases too. General Motors and Ford predict automobile sales, on pace for the best year since 2007, will remain resilient. Cars and light trucks sold at a 15.3 million annual rate in February after 15.2 million a month earlier, according to Ward’s Automotive Group.

“Consumers appear to be taking higher payroll taxes in stride, at least when it comes to replacing older vehicles,” Kurt McNeil, vice president of U.S. sales operations for Detroit-based GM, said on a March 1 conference call.

Norris Home Furnishings, a Fort Myers, Fla., furniture retailer with three stores, exceeded its goal for 15 percent sales gains in January and February from a year earlier, company owner Larry Norris said. Rising home prices in the region have improved consumer attitudes even in the face of higher taxes, the 70-year-old business owner said.

“People are a lot more cautious with their money than they were at one time, but they are still spending,” he said. “Consumer attitudes are improving, no question.”

Retailers including Gap and Limited Brands reported sales at stores open at least a year rose 3 percent in February, exceeding analysts’ forecasts. Gap also owns the Banana Republic and Old Navy store chains, while Limited’s brands include Victoria’s Secret. Costco Wholesale Corp., the largest U.S. warehouse-club chain, reported a 6 percent jump that also topped analyst estimates.

The improving outlook for sales is encouraging businesses to expand and add workers.

Lowe’s Cos., the second-largest U.S. home-improvement retailer, is boosting spending on store upgrades and hiring. The Mooresville, N.C.-based company said it plans to open 10 stores in 2013.

Labor Department data released on March 8 showed overall hiring jumped by 236,000 last month after 119,000 in January, and the unemployment rate fell to 7.7 percent, a four-year low.

Together with a gain in average hourly earnings and more hours worked, the latest figures bode well for consumer spending, which accounts for about 70 percent of the economy.

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