U.S. consumers spent more in June and pending sales of previously owned homes also rose, data issued on Tuesday showed, but the biggest drop in incomes in four-and-a-half years pointed to a slow recovery from the worst recession in decades.

Spending rose 0.4 percent in June after a 0.1 percent gain the previous month, the Commerce Department said, partly because of higher gasoline prices. But after adjusting for inflation, spending, which accounts for over two-thirds of U.S. economic activity, fell 0.1 percent after being flat in May.

Savings slipped from a recent rising trend as strapped consumers had to dig deeper to spend.

This is indicative of the state of the economy. As we turn the corner on this recession, we find the economy stabilizing but definitely not resurging. We're going to see fairly soft economic numbers for some time, said Robert Dye, a senior economist at PNC Financial Services Group in Pittsburgh.

U.S. stocks opened lower on the data, but reversed course after a report showing that pending sales of existing U.S. homes rose for a fifth straight month in June, the first such advancing streak in six years.

While the recession's grip on the economy appears to be slackening, continuing job losses are sapping consumers' willingness to spend and heightening chances that recovery from the longest downturn since the Great Depression of the 1930s will be tepid.

Analysts said sluggish real consumer spending suggested that second quarter gross domestic product (GDP) could be revised to show a bigger decline than the 1.0 percent fall reported by the government last week.

The Commerce Department said personal incomes declined 1.3 percent in June, as the effects of one-time government stimulus checks, part of the government's $787 billion package to jump start the economy, wore off.


The drop in personal income was the biggest decrease for any month since January 2005. During June, private wages and salary disbursements decreased $28.6 billion after dropping $11.3 billion in May, the department said.

An independent monthly survey showed on Tuesday that salaries at small U.S. companies were at their lowest level in July since March 2006.

Reduced wealth, high debt, tight credit, and a weakening labor market are all weighing on consumers. Consumers remain a missing link in hopes for strong recovery, said Nigel Gault, chief U.S. Economist at IHS Global Insight in Lexington, Massachusetts.

Real disposable income -- the money left over after taxes and adjustment for price rises -- tumbled 1.8 percent in June, the largest decline in a year, and savings fell.

The amount of after-tax income Americans stashed away decreased to an annual rate of $505 billion in June from $681 billion in May. The saving rate -- the percentage of disposable income saved -- slipped to 4.6 percent after jumping to 6.2 percent in May.

Analysts said consumers were most likely done saving for now, adding that programs such as the government so-called cash for clunkers, aimed an encouraging driver to trade in their old vehicles with higher fuel consumption for new ones, could see household holds save less in the months ahead.

They said this could boost consumer spending in the third quarter and contribute to growth in overall output.

Fear is subsiding somewhat. Consumers are starting to spend some of the cash they have been hoarding. You are seeing that with automobiles and consumer goods in general, said Tommy Williams, president of Williams Financial Advisors in Shreveport, Louisiana.

In a sign that the weak demand is suppressing price pressures, a gauge of inflation closely watched by the Federal Reserve, moderated slightly in June. The year-on-year personal consumption expenditures index excluding food and energy rose 1.5 percent after a 1.6 percent increase in May, the Commerce Department said.

Separately, the Pending Home Sales index rose 3.6 percent to 94.6, making the fifth straight month of advance and the first such streak in six years, the National Association of Realtors the industry group said.