The U.S. economy stayed on a sluggish growth path early in the second quarter, with high gasoline prices constraining consumer spending and helping to push pending home resales to a seven-month low in April.

Consumer spending increased 0.4 percent for a 10th straight month of gains, the Commerce Department said on Friday, after rising 0.5 percent in March. But prices rose 0.3 percent, leaving spending up just 0.1 percent when adjusted for inflation.

We see the soft patch of the first quarter bleeding, at least, into the first half of the second quarter, said Robert Dye, senior economist at PNC Financial Services in Pittsburgh.

The rising cost of living was also blamed in part for an 11.6 percent plunge in contracts to buy previously owned homes last month.

Higher gasoline may be making potential home buyers a bit cautious, said Gus Faucher, director of macroeconomics, Moody's Analytics, West Chester, Pennsylvania.

Data on Thursday showed consumer spending -- which accounts for about 70 percent of U.S. economic activity -- grew at a tepid 2.2 percent annual rate in the first quarter after a 4.0 percent clip in the final three months of 2010.

That contributed to holding back growth to a 1.8 percent pace during the quarter.


Though gasoline prices are starting to fall, economists are worried that incomes -- which have failed to keep up with inflation -- will hamper spending. So far, some consumers have been drawing down their savings to fund their purchases.

Incomes rose 0.4 percent last month, but disposable incomes adjusted for inflation were flat for a second straight month. Real incomes have not grown this year and the savings rate stayed at a 2-1/2 year low of 4.9 percent in April.

Consumers have dipped into savings in order to make it through this challenging environment, said Michael Feroli, an economist at JPMorgan in New York.

Just as consumers used savings to smooth through the energy price spike on the upside, any move to rebuild saving in the wake of easing gas prices could soften the lift to what otherwise should be a very stimulative development.

The retreating gasoline price helped to lift consumer spirits this month and dial down their inflation expectations.

Thomson Reuters/University of Michigan Surveys of Consumers' final May consumer sentiment rose to 74.3 from 72.4 in the preliminary May reading.

The national price for regular unleaded gasoline prices slipped to $3.90 a gallon in the week through Monday, according to the Energy Information Administration, after peaking just above $4 a gallon early in the month.

This is giving some economists a reason to be optimistic.

We are optimistic that the recent easing of gas prices -- if it continues -- will provide a tailwind to consumption in the coming months, said Joseph LaVorgna, U.S. chief economist at Deutsche Bank in New York.

High gasoline prices caused the year-on-year inflation rate to rise 2.2 percent, the biggest rise in a year, after increasing 1.8 percent in March.

Excluding food and energy - inflation increased 1 percent, the largest gain since September, after rising 0.9 percent in March.

(Editing by Neil Stempleman)