* Consumer spending up for fifth straight month
* Incomes flat as manufacturing payrolls fall
* Savings level lowest since October 2008 (Adds link to Breakingviews column)
By Lucia Mutikani
WASHINGTON, March 29 (Reuters) - U.S. consumers tapped their savings in February to keep spending on an upward path for a fifth straight month, implying that consumption may be strong enough in coming months to keep a recovery going.
The rise in spending despite flat incomes in February suggests households were becoming positioned to pick up the baton from the government and a spate of inventory-rebuilding as the prime drivers of growth.
"Consumers are getting more comfortable, which is an essential ingredient for a sustainable recovery. The Federal Reserve should be pleased to see steady spending growth, but will not raise rates until the job picture improves," said Chris Low, chief economist at FTN Financial in New York.
Spending increased 0.3 percent last month after rising 0.4 percent in January, the Commerce Department said on Monday. The gain was in line with market expectations. Spending normally accounts for about 70 percent of U.S. economic activity.
Debt-stricken Greece's auction of seven-year bonds contributed to a fall in the U.S. dollar against the euro. Dollar weakness, in turn, boosted commodity prices, lifting U.S. stocks to a higher finish. In the bond market, the yield on the 30-year government bond jumped to a nine-month high.
Lackluster spending has raised worries the economic recovery from the worst downturn since the 1930s that started in the second half of 2009 could loose steam when government stimulus and the lift from inventories wanes.
Analysts said the steady rise in spending over the last five months supported views the labor market was turning, with payrolls expected to grow in March.
"It may be the sort of leading indicator of job gains in the sense that things are happening out there that consumers have confidence to spend even though the top line employment numbers haven't been that supportive," said Kurt Karl head of economic research at Swiss Re in New York.
A Reuters survey forecast the closely watched employment report due on Friday to show employers added 190,000 jobs after cutting 36,000 positions in February, largely driven by hiring for the 2010 census.
This would mark only the second time payrolls have increased since the recession started in December 2007. The health of the labor market will determine when the Fed will start raising benchmark interest rates, currently near zero.
Treasury Secretary Timothy Geithner told CNBC the economy was getting stronger and close to sustainable job growth.
"The economy is getting stronger, we are probably just on the verge now of what we think to be a sustained period of job creation, finally, and we are going to continue reinforce that recovery," Geithner said.
Spending adjusted for inflation rose 0.3 percent last month, the Commerce Department said, adding to a 0.2 percent gain in January.
"The increase in both nominal and real spending suggests that real consumption is on course to grow at an annualized rate of around three percent in the first quarter," said Paul Dales, a U.S. economist at Capital Economics in Toronto.
"That would be enough to add one percentage point to first-quarter GDP growth relative to the fourth."
Consumer spending rose at a modest 1.6 percent rate in the fourth quarter, slowing from 2.8 percent in the prior period, according to a government report on Friday.
However, analysts still worry employment growth may not be robust enough and wages will continue to increase modestly, limiting the rise in spending.
Analysts reckon spending last month was lifted by households dipping into their saving as well as sturdy gain in share prices. Savings fell to an annual rate of $340 billion, the lowest level since October 2008.
The saving rate slipped to 3.1 percent, also the smallest rate since October 2008, from 3.4 percent the prior month.
Personal income was flat last month following January's 0.3 percent rise, the Commerce Department said. Payrolls of goods-producing industries fell $3.5 billion in February after increasing $5.2 billion, while manufacturing slipped $1.4 billion following a $5.0 billion gain.
This probably reflected the winter storms that struck parts of the country and kept some hourly paid workers at home.
Real disposable income was flat last month after falling 0.4 percent in January. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Graphic on consumer spending link.reuters.com/huq65j Breakingviews Column [ID:nN29251971] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Editing by Kenneth Barry)