Sept. 29 (Bloomberg) -- Consumer spending in the U.S. rose 0.1 percent last month, less than forecast and the smallest gain since November, as the tumbling housing market made Americans more thrifty.

The rise in spending followed a 0.8 percent July increase, the Commerce Department said today in Washington. Incomes rose and the Federal Reserve's preferred measure of inflation accelerated, the report also showed.

Consumers are finding it harder to tap the equity in their homes, a major source of cash in recent years, as the property market cools. Rising incomes combined with the recent drop in gasoline prices may prevent spending from sliding even more in coming months, ensuring the economy survives the housing slump.

``The consumer is not going to cave in,'' said Mark Vitner, a senior economist at Wachovia Corp in Charlotte, North Carolina. ``Spending will slow, but it will continue to grow at about the same pace as incomes. We are going to see more modest growth. The fall in gasoline prices should give us additional support.''

Economists forecast spending would rise 0.2 percent, after a previously reported 0.8 percent July increase, according to the median of 69 estimates in a Bloomberg News survey.

Falling gasoline prices this month helped boost confidence among American consumers, a separate report showed. The University of Michigan's final index of consumer sentiment increased to 85.4, the highest level in five months, from 82 in August. The latest reading compares with a preliminary figure of 84.4 two weeks ago.

Chicago Manufacturing Survey

Manufacturing in the Chicago area this month unexpectedly accelerated as new orders picked up, a survey from the National Association of Purchasing Management-Chicago showed. The group said today its regional index rose to 62.1 this month from 57.1 in August. A reading greater than 50 signals growth.

Treasury securities fell after the reports, with the yield on the benchmark 10-year note rising 3 basis points to 4.64 percent As of 10:21 a.m. in New York.

The consumer spending report's price gauge tied to spending patterns and excluding food and energy costs, the Federal Reserve's preferred measure, rose 0.2 percent in August and was up 2.5 percent from the same month in 2005. The year-over-year gain was the biggest since April 1995.

Fed's Comfort Zone

Fed Chairman Ben S. Bernanke is among policy makers who have said they would be more comfortable with a 1 percent to 2 percent increase in the measure over a 12-month period.

The central bank last week kept its target rate for overnight lending between banks at 5.25 percent for a second month and said inflation will probably moderate as growth slows and energy prices drop.

``The Fed is willing to be patient to allow a slowdown in the economy to take care of its inflation problem,'' said Avery Shenfeld, a senior economist at CIBC World Markets Inc. in Toronto. ``I don't think core inflation has definitely passed its peak, but it should be by the time 2007 gets under way.''

Incomes increased 0.3 percent in August after a 0.5 percent rise. The monthly gain was the smallest since November. The gain in incomes matched the median forecast in the Bloomberg survey.

Because the increase in spending was smaller than the gain in incomes, the savings rate improved to minus 0.5 percent, from minus 0.7 percent in July. A negative rate suggests consumers are dipping into savings to maintain spending.

Disposable Income

Disposable income, or the money left over after taxes, increased 0.4 percent following a 0.6 percent rise the previous month. The gain left disposable income up 8.8 percent from the same month last year. A decline in incomes in August 2005 caused by uninsured losses from Hurricane Katrina dropped out of the year-over-year calculation last month, explaining the jump.

Taking into account changes in prices, spending dropped 0.1 percent last month, the first decrease since September 2005.

Inflation-adjusted spending on durable goods, such as autos, furniture, and other long-lasting items, fell 1.3 percent, the biggest since October, after rising 1.8 percent. Purchases of non-durable goods dropped 0.2 percent after rising 0.3 percent. Spending on services, which account for almost 60 percent of all outlays, increased 0.1 percent after rising 0.3 percent.

Slower sales have prompted General Motors Corp., Ford Motor Co. and DaimlerChrysler AG's Chrysler unit to announce that they'll make fewer vehicles for the rest of the year than previously estimated.

Home Equity Borrowing

A decline in the amount of cash owners have taken out of home equity may explain some of the drop in spending on durable goods. Homeowners extracted a net $497 billion at an annual rate from home equity in the second quarter, down from $649.2 billion in the first three months of the year, according to figures from James Kennedy, a Fed economist.

``Consumers just have less capacity to leverage the housing market in order to buy autos and other durable goods,'' Brian Bethune, an economist at Global Insight Inc. in Lexington, Massachusetts, said before the report. ``Things could perk up a little in the fourth quarter, but we are seeing a palpable slowdown from what we saw in the first half'' of the year.

Falling Gasoline Prices

Still, rising incomes and falling gasoline prices are a powerful balm for consumers' housing woes, economists said.

``I don't think the consumer is going to be dragged down too much my housing,'' said Tim Rogers, chief economist at Briefing.com, a Boston forecasting firm. ``We have personal income growing, and that is always positive.''

Americans may be able to stretch paychecks even farther as gasoline prices drop. The average price of a gallon of regular gasoline at the pump fell to $2.34 this week, the lowest since March, according to American Automobile Association.

Retailers have started to benefit from lower fuel costs. The International Council of Shopping Centers this week boosted its September sales forecast to a 4 percent gain compared with the same month last year from a previous estimate of 3.5 percent. The increase would be the biggest since May.

A report this week from the Conference Board, a New York research group, showed consumer confidence rebounded this month after reaching a nine-month low in August.

Clarence Otis, chief executive officer of Darden Restaurants Inc., owner of the Olive Garden and Red Lobster restaurant chains, said last week that September sales would be equal to or better than August results due to improving confidence.

``We're seeing consumer psychology improve in the last month or so,'' Otis said in a Sept. 20 interview.

To contact the reporter on this story: Carlos Torres in Washington ctorres2@bloomberg.net.

Last Updated: September 29, 2006 10:27 EDT