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U.S. economy showing strength as spending cuts loom

Sales of new homes jumped nearly 16 percent in January. Home prices are also rising steadily, and banks are lending more.

Sales of new homes jumped nearly 16 percent in January. Home prices are also rising steadily, and banks are lending more.

WASHINGTON — Even with automatic spending cuts looming, the outlook for the U.S. economy brightened a bit Tuesday after reports showed that Americans are more confident and are buying more new homes.

Home prices are also rising steadily, and banks are lending more. Such improvements suggest that the economy is resilient enough to withstand the deep government cuts that will kick in Friday.

That's especially encouraging because uncertainty over the federal budget could persist for months.

"The stars are lining up for stronger private-sector growth this year," said Craig Alexander, chief economist at TD Bank.

Sales of new homes jumped nearly 16 percent in January to their highest level in 4 1/2 years, adding momentum to the housing recovery. Consumer confidence rose in February after three months of declines. And home prices increased in December from the same month in 2011 by the largest amount in more than six years.

The upbeat economic news contributed to a rally on Wall Street. The Dow Jones industrial average jumped more than 100 points.

Consumers still face numerous burdens. Among them is a sharp increase in gas prices. The national average for a gallon, $3.78, has surged 44 cents in a month.

And Social Security taxes rose 2 percentage points beginning Jan. 1. This year, the increase will cost a typical household that earns $50,000 about $1,000. Income taxes for the highest-earning Americans also rose.

Both factors could reduce overall spending.

On Friday, about $85 billion in automatic spending cuts are to kick in, and there's little sign that the White House and Congress will reach a budget deal to avoid them. The cuts will cause furloughs and temporary layoffs of government workers and contractors and sharply reduce spending on defense and domestic programs.

For about 2 million long-term unemployed, benefits now averaging $300 a week could shrink by about $30. Payments that subsidize clean energy, school construction and state and local public works projects could be cut. Low-income Americans seeking heating or housing aid might face longer waits.

Overall, the tax increases and spending cuts could shave up to 1.2 percentage points from growth this year, economists estimate. Alexander estimates that without the spending cuts or tax increases, the economy would expand more than 3 percent this year. Instead, he predicts growth of only 2 percent.

But growth should accelerate later this year as the effects of the government cutbacks ease, he and other economists say.

Payroll tax hike dents confidence

Florida's consumer confidence dipped slightly in February as the effect of higher payroll taxes hit workers, University of Florida researchers said Tuesday.

The monthly survey showed a one-point drop to a score of 74, better than the worst recessionary level but still shy of a score signifying a healthy economy.

Chris McCarty, director of UF's Survey Research Center in the Bureau of Economic and Business Research, predicted consumer outlook will grow even gloomier in the next survey if Congress and President Barack Obama can't avoid huge federal spending cuts.

The index is benchmarked to 1966, which means a score of 100 reflects the level of consumer satisfaction that year.

Times staff

U.S. economy showing strength as spending cuts loom 02/26/13 [Last modified: Tuesday, February 26, 2013 10:50pm]
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