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Consumer confidence, spending unexpectedly up, savings still low

Consumer confidence unexpectedly rose in March to a four month high as Americans embrace the slow rebound of the labor market and seemingly discount the effects of government budget cuts.

“Consumers have discounted the administration’s warning that economic catastrophe would follow the reductions in federal spending, and consumers have renewed their expectation that gains in employment will accelerate through the rest of 2013,” Thomson Reuters/University of Michigan consumer confidence survey director Richard Curtin said in a statement.

Both spending and earning increased throughout February. Personal income increased 1.1 percent, or $143.2 billion, while disposable income also increased  by 1.1 percent to $127.8 billion, according to the Bureau of Economic Analysis.

“The boost in consumer spending, which accounts for 70 per cent of economic activity, and incomes points to strengthening economic growth in the first few months of 2013,” The Financial Times writes.

Consumers are dipping into their saving to support this increase in spending. The savings rate did rise to 2.6 percent for February, which up from 2.2 percent in January, but down from 4 percent last July.

That’s one of the lowest rates since the height of the housing bubble in 2007. Savings rates have been as high as 12 percent throughout the 1970s and 80s, but bottomed out to 1 percent in 2001 and 2005.

“The majority of Americans are woefully under-saved for both emergencies and retirement and they know it,” says Greg McBride, a senior financial analyst at Bankrate.com, a personal-finance research and publishing company. “Only one in four Americans has an adequate savings account to cover six months of expenses.”

Meanwhile, housing prices are picking up along with the stock market as consumers find relief at the gas pump, a sign to many that things are moving in the right direction.

“We will start to see the consumer become a little more engaged this summer and into the second half of the year,” Russell Price, senior economist at Ameriprise Financial Inc. in Detroit, said to Bloomberg. “We are going to see some improvement in consumer confidence as we go forward and people put concerns about the sequester behind them,” he predicts.

“It’s domestic growth that’s driving the economy — it’s housing, it’s consumer spending, it’s business consumption,” Carl Riccadonna, a senior U.S. economist at Deutsche Bank Securities in New York, said.

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