By Jason Lange
WASHINGTON (Reuters) - Home prices rose in February at their fastest rate in almost seven years, a fresh sign the housing market recovery will help counter the drag on the economy from government belt tightening.
The S&P/Case Shiller index of 20 metropolitan areas released on Tuesday showed single-family home prices rose 9.3 percent in February from a year earlier.
The data reinforces the view that rising home prices could make Americans feel better about spending this year, helping counter a hit to economic growth from tax hikes and government spending cuts.
"This will be a powerful positive fundamental not only for housing but presumably helpful for consumer spending as well," said Stephen Stanley an economist at Pierpont Securities in Stamford, Connecticut.
Another report showed U.S. consumer confidence rebounded in April as Americans felt better about the outlook for the economy and their income prospects.
The Conference Board, a private industry group, said its index of consumer attitudes rose to 68.1. Economists polled by Reuters had expected a reading of 60.8.
Still, there appears to be a growing risk that weakness in the labor market and broader economy could dial down the housing recovery's strength. Hiring slowed dramatically in March and economic growth was lackluster in the first quarter, raising fears the economy could struggle to cope with Washington's austerity drive.
Business activity in the U.S. Midwest unexpectedly contracted in April to its lowest level since September 2009 as a gauge of employment pulled back, another report showed.
The Institute for Supply Management-Chicago business barometer fell to 49, falling short of economists' expectations for 52.5.
Other recent data has pointed to less steam building in the housing market, but rising prices could give construction firms more incentive to build new homes and increase inventories. A dearth of homes on the market has held back sales.
The S&P/Case Shiller index showed prices gained 1.2 percent in February on a seasonally adjusted basis from January, topping forecasts for a 0.9 percent gain.
Following a spectacular collapse that fueled the 2007-09 recession, the housing sector appears to have turned a corner and prices have been rising since February 2012.
MORE MONETARY STIMULUS AHEAD
The data came as the Federal Reserve prepared to open a two-day meeting on monetary policy. Yields on U.S. government debt fell on the prospect the Fed would continue buying bonds to support the economy. U.S. stock prices also fell.
A recent slew of weak U.S. growth data has raised expectations the Fed will keep its pace of bond buying at $85 billion a month throughout the year.
The Fed has kept overnight interest rates near zero since late 2008 and it has tripled its balance sheet to about $3 trillion through purchases of securities, which are aimed at pushing longer-term borrowing costs lower.
A separate report showed U.S. labor costs rose a modest 0.3 percent in the first quarter, pointing to a lack of inflationary pressures that could give the Fed space to continue its monetary stimulus.
Wages and salaries, which account for 70 percent of employment costs, increased 0.5 percent in the first quarter, and were up 1.6 percent in the 12 months through March, according to the report from the Labor Department.
Workers' benefits rose 0.1 percent during the quarter, the slowest pace since 1999. The data may have been distorted by an error found in benefits data for sales and office workers, but the department said the data error probably did not have a major impact.
(Reporting by Jason Lange in Washington and Leah Schnurr in New York; Editing by Neil Stempleman)