Consumers lift spending to pay for pricier gasoline WASHINGTON (Reuters) - U.S. consumer spending rose in August as households stretched to pay for higher gasoline prices and factory activity in the Midwest contracted this month for the first time in three years, pointing to lackluster economic growth. The Commerce Department said consumer spending rose 0.5 percent after an unrevised 0.4 percent gain in July. The increase was the biggest in six months, but was largely accounted for by pricier gasoline. When adjusted for inflation, spending edged up a scant 0.1 percent after increasing 0.4 percent in July. Demand growth in has slowed materially in recent months, across household, business and export sectors. The risks to output growth in the near term remain firmly to the downside," said Peter Newland, a senior economist at Barclays in New York. With the inflation adjusted spending barely rising last month, growth in real consumer spending is unlikely to improve much this quarter from the tepid 1.5 percent annual pace recorded in the April-June period. The growth picture was further dimmed by a second report from the Institute for Supply Management-Chicago showing its business barometer fell to 49.7 from 53.0 in August. The drop below the 50 mark, which separates growth from contraction, was the first since September 2009 and reflected a contraction in new orders and a slowdown in hiring. It was in line with recent reports flagging a cooling in manufacturing, a sector that has been the pillar of the economy's recovery from the 2007-09 recession. "To the extent that the moderation in manufacturing activity is reflecting weakening domestic and global demand, it may be a harbinger of continued sup-par GDP growth performance in the coming months," said Millan Mulraine, a senior economist at TD Securities in New York. But households appear little perturbed by the expensive gasoline and gathering dark clouds over the economy. Consumer confidence touched a four-month high in September, boosted by higher stock market prices and gains in home values. The Thomson Reuters/University of Michigan's final reading on consumer sentiment rose to 78.3 from 74.3 in August, a third report showed. U.S. stocks were trading lower, while prices for U.S. Treasury debt rose. The dollar gained versus a basket of currencies. Consumer spending accounts for about 70 percent of U.S. economic activity and the second straight monthly increase mostly reflected higher gasoline prices, which rose 28.2 cents per gallon last month, though automobile purchases also helped. Household spending on services rose a modest 0.2 percent compared to 0.3 percent in July. In the 12 months through August, the PCE price index rose 1.5 percent after increasing 1.3 percent in July. However, a measure which strips out food and energy costs, rose only 0.1 percent from July. In the 12 months to August, the core PCE price index, increased 1.6 percent - matching July's increase. It was the fifth straight month of increases below 2 percent. The Federal Reserve has a 2 percent inflation target and the still-moderate pace of inflation should give the U.S. central bank comfort to maintain its accommodative monetary policy stance for a while as it seeks to spur job growth and domestic demand. This story adds dropped letter to headline