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Consumers boost spending, but growth remains modest

WASHINGTON U.S. consumer spending inched up last month as Americans' income grew at the fastest pace in six months. But high unemployment, government budget cuts and tax increases earlier this year are hindering the recovery.

Consumers' spending on goods and services rose 0.3 percent in August, the Commerce Department said Friday. That's up from a 0.2 percent gain in July, which was slightly more than the 0.1 percent reported last month.

Income rose 0.4 percent in August, the best gain since February and up from a 0.2 percent July increase. Private wages and salaries rose 0.5 percent, while the government wages and salaries rose 0.2 percent.

The government figures would have been higher if not for forced federal furloughs that reduced wages and salaries by $7.3 billion.

Consumer spending drives 70 percent of economic activity. Many analysts say the increases are not enough to accelerate economic growth from the 2.5 percent annual rate in the April-June quarter.

Paul Ashworth says the economy is growing in the July-September quarter at an annual rate of 2 percent to 2.5 percent, based on the figures. Still, the pickup in August could signal stronger growth in the final three months of the year.

But other economists predict the economy is expanding at a rate below 2 percent. Americans saved some of the extra money they earned last month. The personal savings rate edged up to 4.6 percent of after-tax income, a slight improvement from 4.5 percent in July.

"Weak income growth continues to restrain consumer spending growth," said Stuart Hoffman, chief economist with PNC Financial Services Group," in a research note. "With the unemployment still above 7 percent wages are increasing very slowly, and income growth is coming primarily from more jobs. Tax increases at the beginning of 2013 and unpaid furloughs for federal government workers are also restraining disposable income growth."

By contrast, consumers are benefiting from mild inflation. An inflation gauge tied to consumer spending increased 1.2 percent over the past 12 months, well below the Federal Reserve's 2 percent target. Some Fed officials have argued that the central bank should not start reducing its support for the economy until inflation has risen closer to the Fed's target.

A recent spike in interest rates and mixed signals from the job market were key reasons the Fed decided held off last week on reducing its $85-billion-a-month in bond purchases. The Fed also scaled back its economic growth estimate for this year and next.

There are some signs that consumers may be better positioned to step up spending soon.

The number of people seeking unemployment benefits has sunk to its lowest point in six years because few companies are laying anyone off anymore. That has led some economists to predict that employers added 200,000 jobs or more jobs in September - the most since February.

And gas prices are falling again. The average national price for a gallon of regular gas on Thursday was $3.43. That's 11 cents cheaper than a month ago and the lowest since January.