Consumer spending up, manufacturing grows

Shoppers look at appliances at a Home Depot store in New York in this December 23, 2009 file photo.

NEW YORK (Reuters) - U.S. consumer spending increased slightly faster than expected in January while the U.S. manufacturing sector grew, underscoring views economic recovery is progressing.

The Commerce Department said on Monday spending rose 0.5 percent, increasing for a fourth straight month, after advancing by an upwardly revised 0.3 percent in December. Consumer spending in December was previously reported to have increased 0.2 percent.

Analysts polled by Reuters had expected consumer spending, which normally accounts for over two-thirds of U.S. economic activity, to increase 0.4 percent in January.

"The message is continuing progress for the economy, if not as fast as hoped," said Pierre Ellis, a senior economist at Decision Economics in New York.

An industry report said the U.S. manufacturing sector grew in February but at a slower rate than was expected. Analysts said it was still proof the economy is on the mend.

The Institute for Supply Management (ISM) said its index of national factory activity declined to 56.5 in February from 58.4 in January. The median forecast of 80 economists surveyed by Reuters was for a reading of 57.5.

A reading below 50 indicates contraction in the manufacturing sector, while a number above 50 means expansion.

U.S. stocks added to gains after the ISM report as it showed the economy continued to grow. U.S. bonds were steady. The U.S. dollar maintained its gains against the euro and yen.

The ISM number "is still at the second highest level since late 2005," said Peter Boockvar, equity strategist at Miller Tabak and Co in New York. "The data provides more evidence that manufacturing continues to lead this economic recovery."

Another report showed U.S. construction spending fell for a

third straight month to its lowest level since June 2003 in January.

Meanwhile, Federal Reserve Chairman Ben Bernanke announced that Fed Vice Chairman Donald Kohn, a 40-year veteran of the central bank, is stepping down in late June.

Consumer spending has been held back by stubbornly high unemployment and analysts worry the economy's recovery from the most painful downturn since the 1930s could stumble in the second half of the year if spending remains lackluster.

The economy expanded strongly in the second half of 2009, driven by a sharp slowdown in the rate at which business liquidated inventories. Analysts expect stock rebuilding and continued improvement in business spending to support growth into the first half of 2010.

Consumer spending rose at a modest 1.7 percent annual rate in the fourth quarter from 2.8 percent in the prior period.

Spending adjusted for inflation rose 0.3 percent in January, picking up from a 0.1 percent gain the prior month. Personal income edged up 0.1 percent, a month after increasing 0.3 percent in December, the Commerce Department said. That was well below market expectations for a 0.4 percent increase.

Real disposable income fell 0.6 percent in January, the largest decline in seven months, after increasing 0.2 percent the prior month.

The drop in income pulled the savings rate down to an annual rate of $367.2 billion, the lowest level since February 2009.

The savings rate fell to 3.3 percent, the lowest since October 2008, from 4.2 percent in December.

(Reporting by Lucia Mutikani and Caroline Valetkevitch; Additional reporting by Angela Moon, Ellen Freilich and John Parry in New York, Editing by Andrew Hay)