WASHINGTON (AP) — Thanks to solid job creation, Americans spent more at retailers in February despite smaller paychecks. The surprisingly strong increase helped allay fears that higher Social Security taxes and gasoline prices might chill spending early this year.
Much of the increase in February retail sales compared with January reflected the higher gas prices. But even excluding the volatile categories of gas, autos and building supply stores, so-called core retail sales rose strongly.
Economists were encouraged by the healthier-than-expected numbers from the Commerce Department on Wednesday. Afterward, some revised their estimates of U.S. economic growth for the January-March quarter.
Americans increased their overall retail spending 1.1 percent last month over January, the department said. It was the sharpest month-to-month increase in five months.
Core sales rose 0.4 percent. And the government revised up its January figures to show that core sales rose 0.3 percent from December, better than its initial estimate of a 0.1 percent gain.
Over the past 12 months, retail sales have risen 4.6 percent — far more than consumer inflation, which has been less than 2 percent over that time.
The retail sales report is the government's first look each month at consumer spending, which drives about 70 percent of economic activity.
"This all suggests that the hit to spending from the payroll tax cut and higher gasoline prices, which reduce the amount of cash available to spend on other items, hasn't been too bad," said Paul Dales, senior U.S. economist at Capital Economics. "The recent pickup in both employment and earnings growth bodes well for consumption growth later in the year, too."
The retail sales figures and a separate report that U.S. companies increased their restocking in January led Barclays to raise its estimate of growth in the first quarter by nearly a full percentage point — to an annual rate of 2.5 percent. That would be a leap from the scant 0.1 percent annual growth rate in the October-December quarter.
Auto sales jumped 1.1 percent last month, the sharpest gain since December. Sales at gas stations surged 5 percent, the most since a 6 percent increase in August.
Sales at general merchandise stores, which include major department stores such as Macy's and big discount stores such as Wal-Mart and Target, rose 0.5 percent in February. But the department store category as a whole fell 1 percent.
"Consumers went out and spent lots of money in February led by a jump in vehicle purchases and gasoline sales," said Joel Naroff, chief economist at Naroff Economic Advisors.
Naroff said he thinks retail spending, if it strengthens further, could increase economic growth from an annual rate of 2 percent or slightly higher in the January-March quarter to a 4.2 percent rate in the April-June quarter. That would likely be strong enough to drive down the unemployment rate, which is a still-high 7.7 percent.
But Naroff said his forecast is based on the assumption that Congress and the Obama administration will strike a deal to reverse the automatic government spending cuts that took effect March 1. If they don't, he said the economy would likely grow more slowly — at an annual rate of around 3 percent — in the April-June quarter.
Economists said the end of a two-year cut in the Social Security tax is being offset by stronger job growth, along with rising home and stock prices. Gains in home equity and stock holdings tend to make consumers feel wealthier and more willing to spend.
Chris G. Christopher Jr. of IHS Global Insight said spending should also be helped by a recent retreat in gas prices, which gives consumers more money for other goods and services that contribute to the U.S. economy.
The Social Security tax increase has reduced take-home pay this year for most workers. Someone earning $50,000 has about $1,000 less to spend in 2013. A household with two high-paid workers has up to $4,500 less.
But consumers may be able to absorb higher taxes if employers continue to step up hiring. The economy added 236,000 jobs in February, driving the unemployment rate down to 7.7 percent, its lowest level in more than four years. The gains signaled that companies are confident enough in the economy to intensify hiring even in the face of tax increases and government spending cuts.
Since November, employers have added an average of 205,000 jobs a month, up from 154,000 a month in the previous four months. The hiring spree has been fueled by steady improvement in housing, auto sales, manufacturing and corporate profits, along with record-low borrowing rates.
An improving in job market has also helped lift consumer confidence. And if it continues, it could provide a spark to growth after a dismal fourth quarter of 2012.
Still, reports from individual retailers suggest that how companies that cater to lower- and middle-income shoppers are struggling more than others.
Bruce Efird, CEO of the discount chain Fred's, said last week that delayed tax returns and the higher Social Security tax appeared to dampen his customers' spending.
And Wal-Mart worried investors last month after a leaked email describing the first two weeks of February as a "total disaster."
But Charles Holley, Wal-Mart's chief financial officer, told investors Tuesday that sales at its namesake U.S. business have rebounded since then.
"I believe the slowdown had a lot to do with the delay of the tax refunds," he told investors.
AP Retail Writer Anne D'Innocenzio in New York contributed to this report.