By Lucia Mutikani
WASHINGTON (Reuters) - Retail sales expanded at their fastest clip in five months in February, the latest sign of momentum for an economy facing headwinds from higher taxes and pricier gasoline.
The solid sales came on the heels of strong gains in employment and manufacturing. But the improvement in the economic picture is likely insufficient to compel the Federal Reserve to reduce its monetary policy support.
"Consumers have been less fazed by the increase in taxes than we expected," said Gus Faucher, a senior economist at PNC Financial Services in Pittsburgh. "Because the labor market has been doing a bit better than we were expecting, people are feeling a bit confident and not cutting back their spending."
Retail sales increased 1.1 percent, the largest rise since September, after a revised 0.2 percent gain in January, the Commerce Department said on Wednesday. That was well above economists' forecasts for a 0.5 percent advance.
So-called core sales, which strip out automobiles, gasoline and building materials and correspond most closely with the consumer spending component of the government's measure of gross domestic product, rose a stronger-than-expected 0.4 percent.
The upbeat report helped extend a stocks rally on Wall Street, with the Dow Jones industrial average <.DJI> rising for a ninth straight session for the first time since 1996. <.N>
It also lifted the dollar to a seven-month high against a basket of currencies. Prices of U.S. government debt slipped.
The healthy sales gains came despite the end of a 2 percent payroll tax cut and a hike in tax rates for wealthy Americans at the start of the year.
The stock market rally, rising home prices and steady job gains, which are starting to push wages higher, have helped consumers. Households are also cutting back on saving.
The firming economic tone was also underscored on Wednesday by a survey showing U.S. chief executive officers grew more confident in recovery in the first quarter. However, they remained hesitant to step up hiring.
While employment growth quickened last month, economists say the Fed needs to see a sustained stretch of even stronger job growth to step away from its very easy monetary policy stance. The central bank is buying $85 billion in bonds per month and has said it would keep up its asset purchases until it sees a substantial improvement in the labor market outlook.
"The economy in February is looking solid in employment, manufacturing, non-manufacturing activity, and retail sales," said John Ryding, chief economist at RDQ Economics in New York. "None of this, however, is likely to cause the Fed to change tack in the near term."
GROWTH FORECASTS RAISED
The gains in core sales in the first two months of the year suggested that consumer spending, which accounts for about 70 percent of the U.S. economy, may only slow a bit from the 2.1 percent annual rate notched in the last three months of 2012.
Economists had expected the increased tax burden and higher gasoline prices to weigh more heavily.
Growth prospects for the first quarter were further bolstered by a second report from the Commerce Department showing business inventories rose by the most in more than 1-1/2 years in January.
Retail inventories excluding autos - which go into the calculation of gross domestic product - recorded their largest increase since August 1995. Inventories had subtracted 1.6 percentage points from fourth-quarter GDP.
The strong pace of inventory accumulation in January and the healthy reading on core retail sales prompted some economists to raise their first-quarter GDP estimates.
JPMorgan analysts bumped their forecast up by eight-tenths of a percentage point to 2.3 percent, while Goldman Sachs raised theirs by three-tenths of a point to 2.9 percent.
The economy grew at a rate of only 0.1 percent in the fourth quarter. A Reuters survey of economists forecast growth averaging 1.8 percent this year, down slightly from 1.9 percent in a poll last month. The latest survey was conducted before Wednesday's retail sales report.
Part of the rise in retail sales reflected a 35 cents a gallon increase in gasoline prices, which helped lift sales at service stations by 5 percent, the largest gain since August.
But there was also strength in sales at auto dealerships, which rose 1.1 percent.
Excluding autos, retail sales increased 1 percent, the most in five months.
Sales at building materials and garden equipment suppliers increased 1.1 percent, reflecting gains in home building. Sales also rose at clothing and general dealer stores.
Online shopping receipts also moved higher
However, delays in processing tax refunds probably hurt sales at restaurants and bars, and at sporting goods, hobby, book and music stores, which all registered declines. Sales of electronics and appliances also slipped, as did furniture sales.
(Reporting by Lucia Mutikani; Editing by Neil Stempleman, Tim Ahmann and Dan Grebler)