updated 3/1/2004 1:15:40 PM ET 2004-03-01T18:15:40

Consumers boosted their spending by a solid 0.4 percent in January, a fresh sign they are keeping their pocketbooks and wallets sufficiently open to keep the economic recovery going.

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The over-the-month increase reported by the Commerce Department on Monday matched analysts’ expectations. The advance came after a bigger 0.5 percent rise in December, which was slightly stronger than first estimated a month ago.

In other economic news, factory activity expanded in February. The Institute for Supply Management said its manufacturing index was 61.4 last month, following a reading of 63.6 in January. An index reading above 50 signifies expansion, while one below 50 indicates contraction.

Construction spending, meanwhile, dipped by 0.3 percent in January, the first decrease since May, as bad winter weather in some parts of the country delayed the start of new projects, the Commerce Department said.

The decline followed a revised 0.6 percent increase in December, which marked a stronger performance than previously estimated. Although economists were calling for a 0.3 percent increase for January, even with the drop, the level of construction spending hovered near an all-time high.

On the consumer front, disposable incomes — what’s left after taxes — rose by 0.8 percent in January, up from a 0.3 percent increase the month before. January’s sizable increase was helped out by a number of factors, including a reduction in federal incomes taxes and pay raises for government workers and those in the military.

The spending and income figures aren’t adjusted for price changes.

Looking ahead, tax refunds, which the government will start mailing out this spring, should help support consumer spending and provide juice to the economy in the first half of the year, analysts say.

But other potentially negative factors — if they aren’t reversed — could weigh on consumers and turn them into more cautious spenders. Consumer confidence took a hit in February and job growth has been painfully slow.

Consumer spending accounts for roughly two-thirds of all economic activity in the United States. Thus, consumer behavior plays a major role in shaping the economic recovery.

Throughout economic hard times and during most of the recovery, it has been consumers who have kept the economy going. But now there are mounting signs that businesses are stepping up to do their part by boosting capital spending — a necessary ingredient for the recovery to be lasting.

Economists are hopeful any possible moderation in consumer spending would be more than compensated by business investment and by growth in other parts of the economy.

Against this backdrop, the Federal Reserve is likely to hold short-term interest rates at a 45-year low of 1 percent when it meets on March 16. Some economists believe the Fed will begin to nudge rates up later this year. Others believe higher rates won’t come until 2005.

With income growth outpacing spending in January, the nation’s personal savings rate — savings as a percentage of after-tax income — rose to 1.8 percent, up from 1.4 percent in December. January’s personal savings rates represented the best showing since October.

In January, consumers trimmed spending on “durable” goods, such as cars, by 3.3 percent. That compared with a 1.7 percent increase in December.

Spending on “nondurables,” such as food and clothes, rose by 1.5 percent in January, up from a 0.2 percent rise. Spending on services went up by 0.7 percent, after a 0.5 percent gain in December.

Copyright 2004 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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