US consumer spending got off to a fairly firm start in the third quarter, rising by the most in five months and offering hope economic growth could pick up this quarter.
Other data out today showed the number of Americans filing new claims for jobless benefits was unchanged last week, indicating a lack of strong improvement in the labour market and keeping additional monetary stimulus from the Federal Reserve on the table.
The Commerce Department said consumer spending increased 0.4% after a flat reading in June.
Last month's rise in consumption, which accounts for 70% of US economic activity, was in line with economists' expectations.
When adjusted for inflation, consumer spending increased 0.4%, also the largest increase since February.
"The improvement in spending activity suggests that overall economic activity may be off to a fairly decent start in the third quarter," said Millan Mulraine, senior macro strategist at TD Securities in New York.
A second report from the Labour Department showed first-time applications for state unemployment benefits were unchanged at 374,000. The four-week moving average for new claims, a better measure of labour market trends, rose 1,500 to 370,250.
Jobless claims have risen by 10,000 in August, suggesting some moderation in the pace of job growth this month after payrolls increased 163,000 in July from 64,000 in June.
Even though data on consumer spending and housing suggest that economic activity picked up early in the third quarter, the state of the labour market could determine whether the Fed offers additional monetary stimulus to the economy at its 12-13 September policy meeting.
The unemployment rate, which ticked up to 8.3% in July, has been stuck above 8% for more than three years, the first time this has happened since the Great Depression.
In addition, business spending is weakening and inflation is slowing.
"Today's data...are not strong enough to prevent the Fed from launching QE3 in mid-September," said Paul Dales, a senior economist at Capital Economics.
US stock index futures held onto earlier losses, while US Treasury debt prices extended earlier gains. The dollar maintained its losses versus the euro and yen.
Consumer spending dipped 0.1% in June when adjusted for inflation and last month's increase was an encouraging sign after consumption growth slowed by the most in a year in the second quarter.
Sluggish consumer spending held back economic growth to a 1.7% annual pace in the April-June period.
Real spending last month was lifted by subdued inflation pressures. A price index for personal spending was flat after edging up 0.1% in June.
In the 12 months through July, the PCE price index rose 1.3% - the smallest increase since October 2009 - after increasing 1.5% in June.
A core measure that strips out food and energy costs was also flat for the first time since September after gaining 0.2% in June.
In the 12 months to July, the core PCE price index increased 1.6%, the smallest rise since October, from 1.8%. The Fed aims for inflation of 2%.
Last month, households increased spending as income increased 0.3% after rising by the same margin in June. Income available to households after stripping out inflation and taxes increased 0.3% after gaining 0.2% in June.
With spending a touch above income growth, the saving rate slipped to 4.2% in July from 4.3% the prior month.