By Lucia Mutikani WASHINGTON (Reuters) - U.S. consumer spending fell in July for the first time in six months, but a rise in confidence among households in August to a seven-year high suggested the retrenchment was likely temporary.
Other data on Friday showed a sharp acceleration in factory activity in the Midwest, underscoring the economy's relatively strong fundamentals.
"Strong labor market gains and consumer confidence at cycle highs should continue to support spending in the coming months, helping GDP growth average 3 percent or higher in the latter half of the year," said Gennadiy Goldberg, a U.S. economist at TD Securities in New York.
Consumer spending dipped 0.1 percent last month after rising 0.4 percent in June, the Commerce Department said.
Economists had expected consumer spending, which accounts for more than two-thirds of U.S. economic activity, to increase 0.2 percent. When adjusted for inflation, it slipped 0.2 percent after gaining 0.2 percent in June.
Spending was weighed down by declines in automobile purchases, while a mild July reduced demand for utilities. Households also cut back on other items.
The weakness in consumer spending at the start of the third quarter poses a downward risk to growth estimates for the period. Most economists, however, still expect another quarter of sturdy growth, citing strong consumer confidence, as well as solid growth in employment, manufacturing and business spending.
Other sectors such as housing and government spending are also on the mend.
Separately, the Thomson Reuters/University of Michigan's consumer sentiment index increased to 82.5 in August, the highest since July 2007, from 81.8 in July.
"It's consistent with continued moderate growth in consumer spending," said Dean Maki, chief U.S. economist at Barclays in New York.
Consumer spending rose at a 2.5 percent annual pace in the second quarter, helping to lift the economy to a 4.2 percent growth rate.
SAVINGS RISE
Spending is lagging income gains but economists expect it to catch up. Income last month rose 0.2 percent after increasing 0.5 percent in June.
With households cutting back on spending, savings hit their highest level since December 2012. Rising savings also bode well for future spending.
Weak consumer spending left inflation pressures muted in July, giving the Federal Reserve room to keep its benchmark overnight lending rate near zero for some time while it awaits an acceleration in wage growth.
A price index for consumer spending edged up 0.1 percent after increasing 0.2 percent in June. That was the smallest rise since February. In the 12 months through July, the personal consumption expenditures (PCE) price index rose 1.6 percent. It also increased by 1.6 percent in June.
Excluding food and energy, prices inched up 0.1 percent after rising by the same margin in June.
The so-called core PCE, which is the Fed's favorite inflation measure, increased 1.5 percent in the 12 months through July, continuing to run below the U.S. central bank's 2 percent target. It had advanced 1.5 percent in June.
In a third report, the Institute for Supply Management-Chicago said its business barometer shot up to 64.3 this month from 52.6 in July. It was the index's biggest monthly point gain since July 1983 and pointed to continued strength in the manufacturing sector.
(Reporting by Lucia Mutikani; Additional reporting by Sam Forgione and Dan Burns in New York; Editing by Paul Simao)