Americans increased spending in February despite new taxes and continued uncertainty in Washington over budget cuts.

Retail spending for February rose 1.1 percent, exceeding analysts expectations by 0.4 percent. The February gains more than doubled the gains in the previous two months.

“There are still a lot of headwinds,” said Karen Dynan, co-director of economic studies at the left-leaning Brookings Institute, “but people are still going up and opening their wallets and spending.”

The first reason reason analysts remain cautious in the face of these strong numbers is gas prices. The second is inflation.

About half of this increase, 0.6 percent, was due to higher gas prices. When Americans pay more at the pump they are forced to cut down in other areas. Fuel prices are dampening an even stronger spending recovery.

“It’s ridiculous, gas prices are ridiculous,” said Lian Shafir, who owns a small construction company and commutes to sites across the five boroughs. Shafir recently cut his cable to save $50 a month. “I don’t go shopping,” he said, “you slow down, you go out less.”

Restaurants and food services sales were down 0.7 percent. When consumers are squeezed they cut back on going out and eat more at home. Food and beverage sales, which includes grocery stores, were up 3.6 percent.

“I stopped drinking beer,” said Bobbi Faison while filling up his car at a Hess gas station in midtown, “I stopped going out to dinner. I can’t afford it.” Faison commutes 500 miles a week maintaining pay phones around New York. His company reimburses him .56 cents per mile on his car, not enough to cover the high fuel prices, he says.

Source: Fred, Saint Luis; US Dept of Energy: Energy Information Administration

But people are spending more: clothing and accessories stores were up 3.1 percent and nonstore retailers—such as direct internet sales—were up 15.4 percent, compared with only 1.6 percent from the previous month. Car sales were up 7.8 percent, from a 1.1 percent last month.

“There is some pent up demand that built up,” said Karen Bynan of Brookings, “you can only go so far repairing your car; at some point you have to replace things.”

Bobbi Faison wants to replace his old Buick. “I’ve been driving this car for 14 years, and I’ve been saving for a car, but man, you can’t save nothing,” but admits proudly, “before the summer’s over I should have enough for a new one.”

The biggest surprise for analysts—who expected sales of only 0.7 percent—has been the strong growth in the face of new taxes. The taxes took effect Jan. 1, but most employees have seen them reflected at the middle or end of the month, when they received their checks. Analysts were expecting February’s sales numbers to reflect the skimpier checks.

“A lot of people expected to see weakness early this year, because of the increase in payroll [taxes], which probably hit a lot of families that were living hand to mouth hard,” said Bynan.

Instead, consumer confidence, spurred by a bullish market, a recovery in the housing market and an improving jobs landscape, continues to inch upwards. “If you look at the trend over the past three months, overall consumer confidence has been gradually improving,” said Michael Brown of Wells Fargo.

Analysts are also downplaying these numbers for fear of inflation.

The worry is that the strong retail numbers are only reflecting a new inflationary streak, driven by high fuel prices and record low interest rates. These worries are overblown. January’s Consumer Purchasing Index (CPI), a measure of inflation through the economy, was flat. February’s CPI was 0.7 percent, not enough to write off these sales gains as only a consequence of inflation.

“I don’t see the economy taking off how people have been hoping this year,” said Karen Bynan of Brookings, “but I do think that we’re seeing some private moment build and I think that a good thing.”

Source: Fred, Saint Luis, Retail Sales and Food Services, Excluding Motor Vehicles and Parts Dealers; US Dept of Commerce, Census Bureau; 7/2010-1/2013


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