In a separate report, consumer confidence as measured by a University of Michigan survey dropped sharply in August, falling 7 points to 83.4, a 12-month low.
"Consumer spending moved ahead at a solid rate in July, but this latest drop in confidence will likely take some wind out of the consumers' sails in the remaining months of the year," said Brian Bethune, an economist at Global Insight, a private forecasting firm.
In a third report, the Commerce Department said orders to factories jumped 3.7 percent in July, even better than the expected 3.3 percent increase. The increase, which followed three months of lackluster gains, was led by an 11 percent jump in demand for transportation goods, including the biggest leap in orders for cars in more than four years.
The report on factory orders showed demand for big-ticket durable goods rose 6 percent, slightly better than the 5.9 percent the government estimated last week. Demand for nondurable goods, items such as gasoline and food, was up 1.3 percent in July.
Investors are hoping the Federal Reserve will calm the financial market turmoil by delivering a series of reductions in the federal funds rate, the benchmark rate for millions of consumer and business loans.
The Federal Reserve got good news in the spending report, which showed that a key inflation gauge tied to consumer spending that excludes food and energy rose just 0.1 percent in July. This measure of core inflation had been up 0.2 percent in June. For the year ending in July, core inflation by this measure is up just 1.9 percent - within the Fed's preferred 1 to 2 percent comfort zone and well below the 2.5 percent year-over-year increase seen in February.
Investors hope this retreat in inflation pressures will give the Fed the leeway to cut interest rates to protect the economy against adverse impacts from housing and financial market turmoil.
