* Consumer spending up 0.8 pct, largest gain in 5 months
* Spending adjusted for inflation up 0.5 pct
* Texas manufacturing slows, businesses pessimistic
* Existing home sales contracts fall 1.3 pct in July (Recasts with details, updates markets)
By Lucia Mutikani
WASHINGTON, Aug 29 (Reuters) - U.S. consumer spending rose at its fastest pace in five months in July, a further sign the economy is not falling back into recession, although manufacturing activity in Texas almost stalled this month.
Consumer spending increased 0.8 percent on strong demand for motor vehicles as Japan-related supply restraints faded, a Commerce Department report showed on Monday. Spending had slipped 0.1 percent in June
The size of the bounceback in spending, which accounts for about 70 percent of U.S. economic activity, beat economists' forecasts for a 0.5 percent advance. When adjusted for inflation, spending was up 0.5 percent last month, the largest gain in 1-1/2 years and the first increase since April.
"It's a little far-fetched to truly believe that we are headed into another recession. This data doesn't support that view at all," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.
The spending data was the latest to suggest the economy started the third quarter with some strength after growth slowed to a near halt in the first half of the year.
But the risks of a new recession have risen this month as stock prices plunged and consumer sentiment eroded.
Graphic-core pce price index: r.reuters.com/qez43s
Graphic-pending home sales: r.reuters.com/vuz43s
Instant view on income/spending: [ID:nN1E77S09Q]
The spending report showed inflation-adjusted after-tax incomes fell in July, while data from the Dallas Federal Reserve Bank indicated factory output in Texas ground to a near halt this month.
The Texas factory index dropped to 1.1 from 10.8 in July, while a business confidence gauge slid to -11.4 from -2.0. The decline in sentiment was in line with other recent regional manufacturing surveys. In these indexes, zero is the dividing line between growth and contraction.
Separately, the number of contracts signed for purchases of previously owned homes fell 1.3 percent last month. The housing market is being choked by an oversupply of properties.
Pending home sales usually lead existing home sales by a month or two and the decline in contracts signed pointed to a fall in August sales.
Investors focused on the spending data and bought U.S. stocks. Prices for U.S. government debt fell, while the dollar eased against a basket of currencies.
ECONOMY NOT FALLING APART
So far data from industrial production to retail sales and employment have been consistent with a slow-growth scenario rather than an outright contraction in economic output. Data for August will give an idea of how much damage the stock market turmoil inflicted on the already wounded economy.
The economy grew at a tepid 1 percent annual rate in the second quarter, with consumer spending rising at its weakest pace since the fourth quarter of 2009. The economy only expanded 0.4 percent in the first three months of the year
Some economists were skeptical the rise spending last month would be sustained, given the 0.1 percent decline in real disposable income, weak consumer confidence and still-sluggish job growth.
"My expectation is that August spending number retreats and income likewise will be flat due to very weak job creation," said Robert Dye, chief economist at Comerica in Dallas, Texas.
U.S. nonfarm payrolls likely increased 75,000 in August after rising 117,000 in July, according to a Reuters survey. The unemployment rate is seen unchanged at 9.1 percent.
Fed Chairman Ben Bernanke left the door open for further monetary stimulus in a speech on Friday in which he said bringing down the high level of joblessness was crucial to ensuring the economy's long-term health.
Although the spending report showed core inflation moving higher, analysts did not think this would tie the U.S. central bank's hands.
The core personal consumption expenditures price index, which strips out food and energy costs -- rose 0.2 percent for a second straight month, taking the year-on-year reading to 1.6 percent, the highest since May 2010, from 1.4 percent in June.
Overall inflation jumped 0.4 percent in July after dropping 0.1 percent in June.
"This does not rule out additional Fed stimulus when policymakers meet in September. But it doesn't exactly rule it in," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York.