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WRAPUP 1-US consumers keep spending despite anxieties

By Eric Burroughs

NEW YORK, Aug 30 (Reuters) - U.S. consumers, undaunted by their nagging anxiety about the economy, shelled out money for autos and other goods at the fastest pace in eight months in July even as incomes stalled.

Meanwhile a key gauge of Midwest manufacturing from the National Association of Purchasing Management-Chicago rose more than expected in August to 54.9, partly reversing a sharp drop in July. The index posted its seventh straight month of growth, soothing fears of a sharp pull-back in the sector.

All together, Friday's data pointed to an economy struggling to get to full speed but unlikely to slip back into recession as some economists feared just a month ago.

Jim Glassman, senior U.S. economist at J.P. Morgan Chase, said if a national manufacturing survey also bounces back when it is released next week, "all those worries about a double-dip recession have to be set aside."

The Institute of Supply Management's August survey on U.S. manufacturing is due on Tuesday and is considered critical for the economic outlook after it also posted a shock fall in July.

Other data this week showed record new home sales and a big jump in durable goods orders but still rising jobless claims.

"This week's news is suggesting final demand is doing pretty well this summer. The only thing that's missing from this picture is job growth," said Glassman.

SHOP TILL YOU DROP

The U.S. Department of Commerce said personal spending surged 1.0 percent in July despite plunging confidence on big stock market losses and corporate scandals. It was the biggest gain since October, beating forecasts and coming in at double the 0.5 percent rise the prior month.

A 3.7 percent advance in spending on durable goods drove the gain, mostly on the back of stronger auto sales spurred by zero-percent financing and other incentives.

The big rise in July spending meant consumption growth in the third quarter could run as high as 4 percent to 5 percent, well above the miserly 1.9 percent of the second quarter. If so, it could ensure overall economic growth picks up smartly to around 3 percent from 1.1 percent the quarter before.

The spending binge came even while consumer sentiment fell for a third straight month. The University of Michigan August index slipped to 87.6 from 88.1 a month earlier.

The final August current conditions index edged lower to 98.5 from 99.3 in July and a mid-month reading of 100.2, while the expectations index, which tracks attitudes about the 12 months ahead, slipped to 80.6 in August from 81.0 in July but was above the preliminary reading of 80.0.

"One of the things we have seen in the past year is that consumers continue to be worried about the economy, but they still seem to be spending," said Steven Wood, chief economist at Financial Oxygen in Walnut Creek, California.

Resilient consumption has encouraged Federal Reserve officials to take a cautiously optimistic line on the economy, saying that interest rates at 41-year lows of 1.75 percent should be enough to keep the recovery on track.

INCOMES STALL

Still, income growth was unchanged after June's revised 0.7 percent gain, the weakest since November 2001 and below forecasts for a 0.2 percent rise. Without steady income gains, it will be difficult for consumers to maintain July's pace of spending, economists warned.

Wages and salaries, the biggest source of income growth, fell 0.2 percent, the first drop since April. With spending strong and incomes flat, the personal saving rate down to 3.4 percent of disposable income. the lowest since December 2001.

"The income number is very important because income will drive spending going forward," said Lynn Reaser, chief economist, Banc of America Capital Management, St. Louis.

"Job and wage growth will remain the driver of spending going forward. But a continued pace of spending faster than income growth is not sustainable," she added.

The report also showed still tame inflation according to the Federal Reserve's favorite measure. The price index for personal consumption expenditures rose at a 1.2 percent rate in July compared with a year earlier, up from 1.0 percent in June. Excluding food and energy, the year-over-year gain was 1.4 percent, down from 1.6 percent in June.