WASHINGTON Consumer spending got off to a fairly firm start in the third quarter, rising by the most in five months and offering hope economic growth would pick up this quarter.
Other data on Thursday showed the number of Americans filing new claims for jobless benefits held steady last week.
The reports were consistent with only moderate economic and job growth, and they kept alive the prospect of additional monetary stimulus from the Federal Reserve.
"The economy does not seem to be faltering or going into reverse," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi in New York. "(But) for a Fed that thinks the economy is not good enough, the data today is not consistent with 3 percent-plus growth or a falling unemployment rate."
Officials at the central bank are debating whether a third round of bond purchases is warranted to spur a stronger recovery, and investors will look to a speech by Fed Chairman Ben Bernanke on Friday for clues on the Fed's next step.
The Commerce Department said consumer spending increased 0.4 percent in July after a flat reading in June. The rise was in line with economists' expectations.
With a gauge of prices holding steady, spending was also up 0.4 percent on an inflation-adjusted basis, which was also the largest increase since February.
While separate reports from U.S. retailers indicated some of the spending momentum carried into August, economists expect spending to cool a bit in the months ahead because of sluggish income growth and a recent rise in gasoline prices.
A range of retail outlets from Costco Wholesale Corp to Limited Brands Inc posted better-than-expected sales gains.
"There was some pent up demand after soft spending through the second quarter," said Robert Dye, chief economist at Comerica in Dallas. "What we are going to need to see is consumer confidence holding its own and moderate job growth for that to continue through the third quarter. Those two key issues are still in doubt."
The Labor Department said first-time applications for state unemployment benefits were unchanged last week at 374,000. The four-week moving average for new claims, a better measure of labor market trends, rose 1,500 to 370,250 - a level economists views as consistent with only sluggish hiring.
Stocks on Wall Street fell as investors turned defensive ahead of Bernanke's speech, while Treasury debt prices rose. The dollar moved up against a basket of currencies.
LABOR MARKET KEY
The level of new claims last week was 10,000 above where it stood at the beginning of the month, suggesting job growth moderated. In July employers had added 163,000 workers, which was a sharp step up from June, when the economy created only 64,000 new jobs.
Even though data on consumer spending and housing suggest economic activity picked up early in the third quarter, business spending is weakening and inflation is slowing.
The jobless rate, which ticked up to 8.3 percent in July, has been stuck above 8 percent for more than three years, the first time this has happened since the Great Depression.
With the labor market not showing decisive improvement, the question of whether the Fed will ease monetary policy further at its September 12-13 policy meeting remains firmly on the table. Atlanta Fed Bank President James Lockhart told CNBC the central bank's decision would be a "close call."
A Reuters poll of fund managers found that only 44 percent think the Fed will announce a third round of bond purchases in September, down from 70 percent last month before July's employment data was released.
The pickup in consumer spending was a welcome bit of news that buttressed the case of hawks at the central bank who think monetary policy has already done enough.
In the second quarter, consumption had expanded at the slowest pace in a year, helping to hold back economic growth to a modest 1.7 percent annual rate.
Others at the central bank could argue that with inflation slowing, there is room to act to spur more vigorous growth.
A price index for personal spending was flat after edging up 0.1 percent in June. In the 12 months through July, this index was up just 1.3 percent -- the smallest gain since October 2009.
A core measure that strips out food and energy costs also held steady last for the first time since September. Over the past 12 month, it has risen 1.6 percent, the least since October.
The Fed aims for inflation of 2 percent. Both the overall and core indexes have been below that target since March, a factor some analysts said could tip the balance toward more easing in the debate at the central bank.
"The Fed is now in danger of falling short on its price stability mandate," said Jeremy Lawson, a senior economist at BNP Paribas in New York. "At the margin, this will make it easier for the doves to make the case for the need to launch a new asset purchase program in September."
Last month, household income increased 0.3 percent after rising by the same margin in June. Income available to households after stripping out inflation and taxes increased 0.3 percent after gaining 0.2 percent in June.
With spending a touch above income growth, the saving rate slipped to 4.2 percent in July from 4.3 percent the prior month.
(Editing by Neil Stempleman and Tim Ahmann)