July 15 (Bloomberg) -- U.S. consumer sentiment unexpectedly rose in July to the highest this year as sustained job growth and rising home values encouraged Americans, a private report showed.

The University of Michigan's preliminary consumer sentiment index for the month rose to 96.5 from 96 in June, to produce the year's first consecutive gain. A reading of 95 was forecast for the month, according to the median estimate in a Bloomberg News survey of economists.

Consumers have become accustomed to rising gasoline prices, which reached a record last week, economists said. They've also become adept at tapping into home equity gains, which may support spending and economic growth in the coming months.

``The recent uptick in gas prices hadn't been steep enough or sustained long enough to spook consumers, who've grown accustomed to prices going up and coming down,'' David Huether, director of economic policy at the National Association of Manufacturers in Washington, said before the report.

The 55 forecasts in the Bloomberg News survey ranged from a high of 100.2 to a low of 91. The preliminary sentiment index is based on a phone survey of about 300 households. The final report for the month, due July 29, will reflect about 500 responses.

The current conditions index, which reflects Americans' perception of their financial situation and whether it's a good time to buy big-ticket items, fell to 112 in July from 113.2 in June. The expectations index, based on optimism about the next one to five years, inccreased to 86.6 from 85.

``A lot of what we've seen in consumer attitude surveys this year has been dictated by energy prices, specifically gas prices at the pump which people see on a daily basis,'' Glenn Haberbush, an economist at Mizuho Securities USA Inc. in Hoboken, New Jersey, said before the report. Still, ``it's a `watch what I do, not what I say' kind of scenario because people are spending even as they're complaining.''

Energy Prices

The average price for a gallon of gasoline at the pump rose to a record $2.33 for the week ended July 11, compared with an average of $2.16 for June and $1.92 for the same week a year ago, according to the Energy Department. Oil prices reached a record $61.20 a barrel on the New York Mercantile Exchange July 7 on concerns that Hurricane Dennis might interrupt production in the Gulf of Mexico.

According to government reports issued the past two days, manufacturing in is improving and retail sales are on the increase. The data suggest inflation fears are receding and economic growth is strengthening.

An index of manufacturing in New York state, which provides an early clue to U.S. factory activity, rose to 23.9 in July from 10.5 last month, the Federal Reserve Bank of New York said today. In June, U.S. industrial production increased 0.9 percent, the most since February 2004, and U.S. wholesale prices were unchanged, other government reports showed today.

Inflation Tame

Prices U.S. consumers paid for goods and services were unchanged in June after declining 0.1 percent in May, the government said yesterday. U.S. retail sales surged 1.7 percent in June after decreasing 0.3 percent the prior month.

Hurricane Dennis, which struck the Florida Panhandle July 10, helped spur sales of food and emergency supplies in the southeastern United States, according to Wal-Mart Stores Inc. On July 9, the world's largest retailer said sales at its U.S. stores which had been open at least a year were rising within this month's forecast range of 3 percent to 5 percent.

Job growth and higher wages are encouraging spending, said David Abella, an analyst with Rochdale Investment Management in New York.

Job creation has averaged 181,000 a month this year, compared with 182,830 in 2004, which was the most since 1999. The unemployment rate fell to 5.1 percent last month, the lowest since September 2001, according to the Labor Department.

Consumer Spending

Consumer spending, which accounts for about 70 percent of the economy, will probably rise at a 3.2 percent annual pace this quarter after increasing 3.6 percent in the first three months of the year, according to the Bloomberg monthly economist survey published July 12.

``In spite of the spike in gas prices, consumer spending is holding up very well,'' Ken Mayland, president of ClearView Economics LLC in Pepper Pike, Ohio, said before the report. ``We know the job picture is better and we know stock price performance has been better and we know they both go into the confidence stew.''

Lower mortgage rates have also buoyed consumer attitudes, allowing many homeowners to refinance at lower borrowing costs and tap equity from increased home values, Mayland said.

Thirty-year fixed mortgage rates remain near the 14-month low of 5.53 percent reached in the the week ending July 1, according to Freddie Mac, the second-biggest purchaser of U.S. mortgages. The Standard and Poor's 500 Index reached 1223.29 July 13, its highest level since March 7.

``The shock has kind of worn off and people are finding that they can afford these oil and gas prices,'' Nariman Behravesh, chief economist at Global Insight Inc., in Lexington, Massachusetts, said before the report. ``Consumers are feeling pretty good and the numbers suggest they're spending at a decent clip.''

To contact the reporter on this story: Victor Epstein in Washington vepstein@bloomberg.net.

Last Updated: July 15, 2005 09:56 EDT