Economy Shows Improvement Despite Tax Hikes, Spending Cuts

    Last week provided us with new insights into how consumer spending and the economy are growing despite the increase in taxes and decreases in spending by the federal government.  Last Wednesday the Commerce Department released advance Retail Sales estimate for February, which showed sales growing 1.1% during the month.  This was the strongest growth in consumer spending in five months, and reflected strong growth in autos, building materials, and gasoline. On Friday, the Federal Reserve released its estimate of Industrial Production, which showed a better than expected 0.7% increase in February.  The Labor Department also released its CPI estimate on Friday, which showed the cost of living in the U.S. increased more than expected due to rising gasoline prices.  The increase brought the year-over-year increase in both the headline Consumer Price Index and core CPI (ex food and energy) at +2.0% year-over-year.  These price increases are below the 2.5% level that the Federal Reserve has recently stated it is comfortable with in the short term.  Headwinds to the economy include initial cuts from Sequestration, which will show up in future economic data.  In all, the reports show an improving economy with subdued inflation pressures, which should not cause the Fed to change its stance on monetary policy at its meeting on Wednesday.