By Jonathan Nicholson
WASHINGTON, Aug 30 (Reuters) - U.S. consumers kept up their strong spending in July, taking advantage of renewed financing incentives to buy cars, even as income growth stalled, a government report released on Friday showed.
The Commerce Department said personal spending surged 1.0 percent in July, its biggest gain since October.
The gain was propelled by a 3.7 percent advance in spending on durable goods. That was also the biggest monthly gain since October, when automakers first put in place no-interest finance deals to jump-start sales in the aftermath of the Sept. 11 attacks on New York and Washington.
Income growth in July was unchanged after June's revised 0.7 percent gain. Without steady income gains, it will be difficult for consumers to maintain July's pace of spending. Economists watch consumer spending closely as it makes up two-thirds of economic activity.
"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.
Wall Street analysts had projected income to rise by 0.2 percent, and spending to be up 0.7 percent.
July's income reading was the weakest since November 2001, when it was also flat. Wages and salaries, the biggest source of income growth, fell 0.2 percent, the first drop since April.
The spending boom pinched consumers' savings, driving the personal saving rate down to 3.4 percent of disposable income. That's the lowest since December 2001 and shows consumers -- despite this summer's revelations of corporate boardroom scandals and stock woes -- remained confident enough to spend at a faster rate than wage gains.
The report also showed inflationary pressures remained tame in the month. The price index for personal consumption expenditures rose 0.2 percent in July after a 0.1 percent gain in June. Excluding volatile food and energy prices, the gauge was up 0.1 percent for a second straight month.
Economic growth slowed in the second quarter, with the pace of growth slumping to a 1.1 percent annual rate from the first quarter's 5.0 percent rate. Growth is expected to perk up in the current quarter but a lackluster job market has raised some concerns about the possibility of a "double-dip" slide into recession after last year's mild downturn.