U.S. consumer spending rose for a second consecutive month in February and sentiment edged up in March, according to reports on Friday that backed views that the worst of the recession may be over.

Spending increased 0.2 percent after rising by an upwardly revised 1.0 percent in January, the Commerce Department said.

The hefty adjustment to January's figure, which was previously reported as a 0.6 percent gain, suggested that consumer spending rebounded in the first quarter after a big drop at the end of last year, analysts said.

It looks as though spending will manage an increase of just over 1.0 percent at an annual rate in the first quarter, said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts.

Consumer spending, which accounts for over two-thirds of U.S. domestic economic activity, fell at a 4.3 percent annual rate in the fourth quarter, the biggest decline since 1980. Spending dropped 3.8 percent in the July-September period.

Plunging asset prices and rising unemployment, as firms reel from the 15-month recession, left households poorer, curbing their spending power. Federal Reserve data this month showed household net worth dropped by $11.2 trillion in 2008.

It is too early to bet on a consumer renaissance, because consumers are still facing severe headwinds from declining employment and reduced wealth. But the worst appears to be behind us, said Gault.

Recent retail and home sales data have also been relatively upbeat, raising guarded optimism that the economy likely did not contract as sharply in the first quarter of 2009 as in the fourth quarter of 2008, when GDP dropped at a steep 6.3 percent annualized pace.

Non-farm payrolls data out next Friday could show the economy shed 654,000 jobs in March, according to a Reuters survey, after February's loss of 651,000 jobs.

While high by historical standards, such an outcome will bolster the view that the pace of job losses is starting to moderate and stabilize at higher levels. Companies are expected to continue laying off workers well into 2010 even as the economy recovers.

GREEN SHOOTS SPROUTING

U.S. stocks fell as investors skimmed profits off a nine-day rally. The Dow Jones industrial ended down 148.38 points at 7776.18, while the S&P 500 dropped 16.92 points to 815.94.

U.S. government bond prices were mixed after a second round of Treasury debt purchase by the Federal Reserve, part of a wider program to jump start the economy.

With job losses escalating, incomes fell by 0.2 percent in February, reversing January's 0.2 percent rise, the Commerce Department data showed.

Despite some green shoots sprouting up here and there, strong downward forces remain in play, said Robert Dye, a senior economist at PNC Financial Services in Pittsburg.

The reinforcing relationship between falling house prices, weaker spending, squeezed profits and rising unemployment has not yet been broken.

Savings fell slightly to an annual rate of $450.7 billion. The saving rate, the percentage of disposable income socked away, slipped to 4.2 percent from 4.4 percent in January, ending a five-month string of increases.

Despite mounting unemployment, consumers morale is perking up a little bit amid hope that the government's $787 billion tax cut and spending plan, and the Fed's measures to stimulate demand, will help revive the economy.

The Reuters/University of Michigan Surveys of Consumers' index of confidence rose to 57.3 in March from 56.3 in February. The index of consumer expectations edged up to 53.5 from 50.5 in February.

But consumers remain worried about their financial health.

Although the data indicate that the downward momentum in confidence ended in the closing months of 2008, there is no evidence that consumers expect their finances to improve any time soon, said survey director Richard Curtin.

With companies showing some ability to raise prices, there are worries that the Fed's massive cash injections into the financial system, aimed at keeping interest rates low, could fuel inflation when the economy recovers.

The Commerce Department report showed prices edged up in February, with the overall personal consumption expenditures price index rising 1.0 percent on a year-over-year basis from 0.8 percent in January. Excluding food and energy, prices were up 1.8 percent over the past 12 months after gaining 1.7 percent in January.

Those economists, including at the Fed, who are counting on several years of moderating core inflation even after the economy begins to recover are likely to be well wide off the mark, said Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut.

(Additional reporting by Steven C Johnson in New York)

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