Economists managed to find some good news amid the gloom and doom of war and recent discouraging economic results.

U.S. personal income numbers for February were up more than expected, rising 0.3% last month, and up 2.8% year-over-year. That, says BMO Nesbitt Burns chief economist Sherry Cooper, was “a welcome relief.” While employment has been discouraging, wages and salaries are slowly chugging higher, she says. “[It’s] not stand-up-and-cheer great, but the direction is certainly encouraging.”

However, BMO says that enthusiasm on the income front was tempered by spending restraint. Spending was flat in the month. “The news was even less encouraging in real terms, where spending has dropped for the past two months, as snowstorms, the looming war, and terrorist warnings kept consumers shuttered,” Cooper says.

RBC Financial says that the spending binge in the autos and housing markets is bumping up against deterioration in fundamentals underlying these two key markets. “For instance, the pace of homebuilding has recently exceeded the rate of new household formations,” says assistant chief economist John Anania. “Furthermore, household balance sheets have deteriorated since 2001. Thus far, spending has been supported by borrowing and the refinancing of debt at today’s lower rates, thus leading to a sizable increase household debt.”

RBC notes that the debt-service burden of households remains near cyclical highs at a time when in previous cycles it has been closer to cyclical lows. Looking ahead, it says, “the focus will be on repairing balance sheets and easing off the gas pedal for spending, a theme that promises to cast a long shadow in what we believe will, nevertheless, be a recovery year in 2003.”

Cooper says that despite the two-month drop in real spending, Q1 is still likely to report about a 1.5% annualized gain in consumption, owing to the surge in spending in December. “The modest rise has been supported by prior tax cuts, past mortgage refinancing activity, and rising incomes.”

RBC says that the personal savings rate edged up last month, a pattern it expects to be repeated in the months to come. “Businesses, in contrast, are ready to play catch up to the wave of consumer spending of the past few years. While consumers kept busy, businesses, plagued by governance problems and a hangover from the investment bubble of the late 1990s, took a breather.

“Inventories were driven down sharply, profits rose and industrial production appears to have formed a bottom this year. Relief on the back of a drop in war-related tensions would see a bounce in business activity as businesses make up for previous inactivity. The result should lead to lasting, yet modest, improvements in production and job gains consistent with a modest growth profile in consumer spending.”