Consumer spending rose at its fastest pace in five months in July, backing views the economy was not falling back into recession, although pending sales of previously owned homes fell.

The Commerce Department said on Monday consumer spending increased 0.8 percent on strong demand for motor vehicles, after slipping 0.1 percent in June.

Economists had expected spending, which accounts for about 70 percent of U.S. economic activity, to rise 0.5 percent.

When adjusted for inflation, spending rose 0.5 percent last month, the largest gain in 1-1/2 years and the first increase since April.

The spending data was the latest to suggest the economy started the third quarter with some strength after growth almost stalled in the first half of the year. It gave hope that output would continue to expand, though at a moderate pace.

If anybody was concerned about this recession risk people were taking about, this personal spending number seems to be another point against that recession argument, said Jeffrey Greenberg, an economist at Nomura Securities in New York. It seems at least through July, the economy was not too poor.

But the risks of a new recession have risen following a sharp drop in stock prices and the erosion of consumer sentiment. Those risks were underscored by a separate report showing pending home resales fell 1.3 percent last month.

The housing market is being choked by an oversupply of properties and is one of the economy's weak spots. Pending home sales lead existing home sales by a month or two and the decline in contracts signed pointed to a fall in August sales.

U.S. stocks rallied on spending data and a possible merger between two big banks in Greece. Prices for U.S. government debt fell, while the dollar eased against a basket of currencies.


So far data such as industrial production, retail sales and employment data have been consistent with a slow economic growth scenario rather than an outright contraction in output.

Consumer spending braked sharply to a 0.4 percent annual pace in the second quarter after advancing 2.1 percent in the first three months of the year.

The overall economy grew at a 1 percent pace in the second quarter after expanding only 0.4 percent in the prior quarter.

Despite the rise in spending last month, economists remain worried about the slow pace of income growth. Income gained 0.3 percent after advancing 0.2 percent in June.

Disposable income increased 0.3 percent, but when adjusted for inflation fell 0.1 percent -- the first decline since September.

The economy is not falling apart, but we need better income growth if we are going to get decent growth and that remains a question mark, said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.

Firms may be waiting to see better consumer demand before hiring but if they don't hire, income gains will be soft and spending will lag.

With spending outstripping real disposable income, savings fell to an annual rate of $582.8 billion from $638.6 billion in June.

Real spending on durable goods increased 2 percent last month, likely reflecting a pick-up in motor vehicle sales as the shortage of autos caused by the supply disruptions from Japan eased.

The report also showed inflation pressures remain elevated. The personal consumption expenditures price index, or PCE, rose 0.4 percent after slipping 0.1 percent in June.

Compared to July last year, the index was up 2.8 percent, the largest increase since October 2008, after advancing 2.6 percent in June.

The core PCE index -- excluding food and energy - rose 0.2 percent for the second straight month.

The core index, which is closely watched by Federal Reserve officials, increased 1.6 percent in the 12 months through July, the largest increase since May 2010, after rising 1.4 percent in June. The Fed would like to see it close to 2 percent.

(Reporting by Lucia Mutikani; Editing by Neil Stempleman)