Tax cuts moved people to shop in February

The Associated Press
Friday, March 11, 2011; 4:50 PM

WASHINGTON -- Americans are using extra money from their tax cuts to buy new cars, clothing, sporting goods and electronics.

The reduction in Social Security taxes helped lift retail sales for the eighth straight month in February and by the largest amount since the fall. Still, higher oil prices threaten to chip away at consumers' disposable income over the next few months.

"Consumers are back, but whether they will stay is the big question," said David Wyss, chief economist at Standard & Poor's in New York.

Retail sales rose 1 percent last month, the Commerce Department said Friday. Shoppers returned to department stores after snow storms kept many away in January. And they flooded car lots to take advantage of deals.

Consumers also paid more for gasoline. Turmoil in the Middle East has sent oil prices surging this winter. Pump prices jumped 9 percent in February to an average price of $3.38 a gallon, according to AAA's Daily Fuel Gauge Report. They have gone up even further this month. On Friday, the average price was $3.54 a gallon.

Tax cuts have helped to ease the shock of higher prices. The reduction in payroll taxes is giving most Americans an extra $1,000 to $2,000 this year.

Economists expect that will boost economic growth this year and lead to stronger hiring. But higher prices for oil, food and other commodities have dampened that outlook slightly.

Consumer sentiment dropped sharply in early March, according to a University of Michigan survey. Many economists cited the jump in gas prices as a major reason for the decline.

Economists at JPMorgan Chase said they were cutting their forecast for overall economic growth in the current January-March quarter, from 3.5 percent down to 2.5 percent, and reducing their forecast for growth in the April-June quarter from 4 percent down to 3.5 percent.

Robert Dye, senior economist at PNC Financial, said: "I am concerned that rising energy prices, a flattening stock market, events in the Middle East and now the earthquake in Japan will just add to a heightened sense of uncertainty at a time when the consumer psyche remains fragile."

President Barack Obama said Friday that he was prepared to tap the nation's emergency oil reserve should the situation demand it.

Most economists stressed that oil prices would have to move much higher - closer to $150 a barrel - to have a serious impact on economic growth. Many still expect healthy growth this year, between 3 percent and 3.5 percent. That would be better than last year's pace of 2.8 percent. But not high enough to significantly lower the unemployment rate, which was 8.9 percent in February.

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