Published: Aug 30, 2010 1:33 PM EDT
Updated: Aug 31, 2010 4:30 AM EDT

WASHINGTON (AP) — Americans spent last month at the fastest pace in four months, helped by a jump in demand for automobiles.

Consumer spending rose 0.4 percent in July after three lackluster months, the Commerce Department said Monday. Spending fell 0.1 percent in April, rose a tiny 0.1 percent in May and was flat in June.

Personal incomes were up 0.2 percent in July, less than expected but at least an improvement over June when incomes had not risen at all.

The July spending gain was the highest since a 0.5 percent rise in March. But the concern is that demand could taper off in the second half of this year if unemployment remains near double digits.

If Americans don't have jobs, they don't have the income to support spending. Consumer spending is critical because it accounts for 70 percent of economic activity.

Peter Newland, an economist at Barclays Capital Research, said he viewed the July increase in spending as a good omen for the rest of the July-to-September quarter.

"All in all, July's report supports our view that consumer spending will continue to recover, albeit modestly, supported by a gradual improvement in labor income," Newland wrote in a research note.

With spending rising, the personal savings rate slowed to 5.9 percent of after-tax income. That's down from 6.2 percent in June, the highest in nearly a year. Even with the July decline, the savings rate is nearly three times higher than it was before the recession began in December 2007.

Economists had long worried about low savings in the United States. But now they fear households have become too frugal and that is holding back consumer spending.

The gain in spending reflected a 1 percent jump in demand for durable goods. About half of that increase came from a jump in auto sales, the government said.

Economists had expected a rebound in spending for July. An earlier government report showed that retail sales rose during the month for the first time in three months.

Still, the economy is growing too slowly to support sustained job growth and some fear it could fall back into a recession. Economic growth slowed to 1.6 percent in the April-to-June quarter, the government reported Friday. That was revised down from the initial estimate of 2.4 percent.

A string of weak economic reports in recent weeks has prompted economists to trim their growth forecasts for the rest of the year and next.

For July, private wages and salaries rose at an annual rate of $23.3 billion. That compared with a decline of $45 billion in June with manufacturing and service payrolls both showing increases.

Government wages and salaries fell at an annual rate of $1.1 billion in July after a decrease of $3.3 billion in June. The decline in the number of temporary census workers subtracted $1.4 billion at an annual rate from federal payrolls in July after subtracting $3.4 billion in June.

The weak economy has kept inflation under control. A price gauge tied to consumer spending rose a modest 0.2 percent in July and is up just 1.5 percent over the past 12 months. Excluding food and energy, prices rose 0.1 percent in July and are up 1.4 percent over the past 12 months.