updated 4/29/2005 10:16:03 AM ET 2005-04-29T14:16:03

Americans’ incomes rose by 0.5 percent in March, the best showing in three months, and they used the extra money to boost consumer spending by 0.6 percent, the government reported Friday.

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The Commerce Department said that the March income gain followed a 0.4 percent rise in February and was the best since a 3.7 percent surge in December, a month when the income figure soared because of a special dividend payment made by computer software giant Microsoft.

The 0.6 percent increase in consumer spending was down only slightly from a 0.7 percent gain in February and no increase at all in January. Both the rise in incomes and spending came in better than economists had expected, bucking a recent trend in which other March statistics showed economic activity slowed significantly during the month.

In a second report, the Labor Department said that Americans’ wages and job benefits rose by just 0.7 percent in the first three months of this year, following an increase of 0.8 percent in the fourth quarter of 2004.

The 0.7 percent increase in the Employment Cost Index represented the smallest rise for wages and benefits in six years and was likely to ease concerns that inflation pressures are mounting.

The 0.6 percent increase in consumer spending during the month was led by a 2.2 percent jump in outlays for durable goods, such as autos and other items expected to last at least three years. Spending on non-durable goods was essentially flat during the month while spending on service, the biggest category of spending, rose by 0.6 percent.

When inflation was taken into account, spending in March rose a more modest 0.1 percent following a 0.4 percent increase in February. That sharp difference was explained in part by the fact that energy prices surged during the month, forcing consumers to spend more at the gasoline pump and leaving them with less to spend elsewhere.

While incomes were up 0.5 percent, disposable incomes, the amount left after paying taxes, also showed a 0.5 percent gain in March. However, that increase was wiped out when inflation was taken into account to show no gain in inflation-adjusted disposable incomes in March following a small 0.1 percent increase in February.

Personal savings, represented as a percentage of disposable income, dropped to 0.4 percent in March, the lowest level for savings since a negative 0.2 percent savings rate in October 2001.

The government reported on Thursday that overall economic growth slowed to 3.1 percent in the first three months of this year, the weakest showing in two years, as consumers and businesses were jolted by higher energy costs.

Economists don’t believe the surge in energy prices this year will be enough to push the country into a recession but they expect the country to have to endure a repeat of what Federal Reserve Chairman Alan Greenspan termed last year a “soft patch.”

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