July 31 (Bloomberg) -- Consumer confidence in the U.S. jumped more than forecast this month to the highest level in almost six years, suggesting the June slowdown in spending may be temporary.

The New York-based Conference Board's index of confidence soared to 112.6, from a revised 105.3 the prior month. Earlier today, the Commerce Department reported that consumer spending rose 0.1 percent in June, slowing from a 0.5 percent gain in May. A measure of inflation closely watched by the Federal Reserve eased.

Confidence among Americans, whose spending accounts for more than two-thirds of the economy, is being shored up by a jobless rate that's near the lowest in six years and income gains that have outpaced inflation. Stocks extended their rally after the report, before surrendering their gains.

``The consumer economy, once again, remains on a firmer footing than it has generally been given credit for,'' said Richard DeKaser, chief economist at National City Corp. in Cleveland, Ohio. ``Even in spite of the pause in spending, we will see them come back.''

DeKaser's forecast of 111 for the confidence index was the most accurate among 67 analysts surveyed by Bloomberg News. The median forecast was for an advance to 105.

In addition to near-record gasoline prices and last week's stock-market rout, consumers have also had to weather falling home values. Home values in 20 U.S. cities fell the most in at least six years, according to the S&P/Case-Shiller index, which declined 2.8 percent in May from a year ago.

Construction Spending

Additional reports today showed construction spending unexpectedly fell last month, while the National Association of Purchasing Management-Chicago said today its business barometer for July fell to 53.4, lower than analysts anticipated, from 60.2. Readings greater than 50 signal expansion.

``The tumble in homebuilding dominated the construction numbers last month,'' said Sal Guatieri, senior economist at BMO Capital Markets in Toronto. ``Once housing stabilizes, we'll see overall construction spending pick up. A stabilization in housing isn't going to happen until early next year.''

Incomes rose 0.4 percent in June for a second month, today's spending report also showed. Income was forecast to rise 0.5 percent, according to the Bloomberg News survey median.

Employment Costs

Employment costs rose at a faster pace in the second quarter, led by the biggest gain in spending on benefits in more than two years, the Labor Department reported separately. The employment cost index rose 0.9 percent in April through June, following a 0.8 percent gain the first three months of the year.

Economists forecast spending would rise 0.1 percent, after an originally reported 0.5 percent increase in May, according to the median of 77 estimates in the Bloomberg survey. Last month's increase was the smallest in nine months.

``The consumer took a breather in June,'' said Julia Coronado, senior economist at Barclays Capital Inc. in New York, whose firm accurately predicted the spending figure. ``It was more of a temporary pullback. Income and wage gains look to be on track, which should help lead to a bounce back in the second half.''

The Dow Jones Industrial Average ended down 1.1 percent at 13,212. Treasury notes rose as investors sought the safety of U.S. government debt on growing evidence of losses among providers of riskier mortgages. The yield on the benchmark 10- year note was 4.73 percent at 4:33 p.m. in New York, compared with 4.80 percent yesterday.

Fed's Preference

The report's price gauge tied to spending patterns and excluding food and energy costs, the Fed's preferred measure, rose 0.1 percent for a fourth consecutive month. The gauge was up 1.9 percent from June 2006, the smallest increase since 2004.

Some Fed policy makers, including Ben S. Bernanke before becoming chairman, have said they'd prefer core inflation within a 1 percent to 2 percent range.

Adjusted for inflation, spending was unchanged in June, after increasing 0.2 percent the prior month, the report showed.

Because the increase in spending was smaller than the gain in incomes, the savings rate improved to 0.6 percent, from 0.4 percent the prior month.

Disposable income, or the money left over after taxes, also rose 0.4 percent for a second month. Adjusted for inflation, disposable income increased 0.3 percent.

Consumer spending rose at a 1.3 percent annual pace from April through June, a third of the previous quarter's increase and the smallest gain in more than a year, last week's report on gross domestic product showed.

Auto Woes

The quarter ended on a bad note for automakers. June sales were the lowest in almost two years, according to industry figures. AutoNation Inc., the largest U.S. auto dealer, last month said its second-quarter revenue declined 6.8 percent.

``There is a direct link between housing and the distress it creates for the consumer around big-ticket items,'' Michael Jackson, AutoNation's chief executive officer, said in a July 26 interview from Fort Lauderdale, Florida.

Sears Holdings Corp., the biggest U.S. department-store company, and Home Depot Inc., the world's largest home- improvement chain, this month said profit will fall as declining home values hurt demand for furniture and building materials.

The housing market will ``remain challenging for the rest of 2007 and into 2008,'' Home Depot's Chief Financial Officer Carol Tome said in a statement July 10.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net.

Last Updated: July 31, 2007 16:37 EDT