Retail sales not hurt by higher taxes, gas prices

Retail sales climbed at an annual rate of 1.1% in February, as strength in auto sales helped show that consumers are not scared off by this year's tax hikes.

Higher gasoline prices also drove spending higher, but sales still rose 0.6% last month, excluding spending at the pump. Strong auto sales, up 1.1% from January, also contributed.

"The headline number was misleading because people had to spend so much more for gasoline, but even excluding gasoline stations the number is very encouraging,'' said Nigel Gault, chief U.S. economist at IHS Global Insight."The numbers support the view that the private sector is gaining momentum.''

The Census Bureau report beat economists' consensus forecast that sales would rise 0.2%, after a 0.1% seasonally-adjusted gain in January.

The numbers boost optimism about the economy's ability to keep growing despite payroll tax increases effective this year for most workers and income tax hikes for wealthy individuals.

Retail sales were 4.6% higher than a year ago, as the government found especially strong gains among sensitive cyclical industries such as vehicles and building materials. Spending at restaurants and on furniture fell for the month.

The report was strong enough to convince investment bank Barclays to raise its first-quarter economic growth estimate to 2.2% from 1.9%.

Earlier, economists had expected the payroll tax hike to shave as much as 1 percentage point from the year-over-year growth in consumer spending, essentially cutting growth in half. Optimism about consumer spending has risen the past month on reports showing the housing market rebound is building strength and specialty retails sales are rising.

Steven Wieting of Citigroup says lower consumer debt and better job prospects are making consumers more confident. The unemployment rate fell to 7.7% in February from 7.9% and 236,000 nonfarm jobs were added to payrolls. Wieting expects growth to accelerate in the second half of the year.

More bearish economists, such as Benjamin Engen of consulting firm Action Economics, concede that the impact of this year's tax hikes is not immediately slowing sales as much as expected.

However, the full impact of automatic federal spending cuts that took effect March 1 is not yet known, he adds, and consumers who have maintained their spending habits by saving less may trim their budgets later this year.

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