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Consumers keep doing their part for economy

Rising home values, better jobs picture cited

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 says.

Nam Y. Huh/Associated Press

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 says.

WASHINGTON — This year got off to a sour start for US workers: Their pay, already gasping to keep pace with inflation, was suddenly shrunk by a Social Security tax increase.

Which raised a worrisome question: Would consumers stop spending and further slow the economy? Nope. Not yet, anyway.

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On Friday, the government said 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.

And in a report Monday, the government said 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 isn’t 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 was likely a temporary response to the higher Social Security tax, and most expect the savings rate to rise back toward last year’s level. That could limit spending.

But several longer-term trends are likely to push in the other direction, economists say, and help sustain consumer spending. Among those trends:

 Wealth is up

 Debt is down

 Jobs are up

 Gas prices are down

 Loan costs are down

Some economists note that the Social Security tax cut didn’t spur much more spending when it first took effect at the start of 2011. The tax cut gave someone earning $50,000 about $1,000 more to spend each year. A household with two high-paid workers had up to $4,500 more.

Despite the tax cut, Baumohl noted that consumer spending rose only 2.5 percent in 2011 and 1.9 percent in 2012. In the 10 years before the recession began in December 2007, the average annual spending increase was 3.4 percent.

And a study by the Federal Reserve Bank of New York found that consumers spent only 36 percent of the increased income that resulted from the tax cut. The rest went to paying down debt or to savings.

Since the tax cut didn’t boost spending that much, its expiration may not drag it down much, either. Economists say temporary tax cuts are often ineffective because many consumers assume that the tax breaks will eventually disappear. So they don’t ramp up spending in response.

New threats 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.

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