Consumer spending grew in July by 0.8 percent, the largest amount in five months. That followed a decline in June and helped ease fears that the U.S. economy is on the verge of another recession.
Americans bought more cars and spent more last month to cool their homes during a heat wave.
Personal incomes increased 0.3 percent last month, the Commerce Department said. That's slightly higher than the modest 0.2 percent in June, the weakest growth in seven months.
The first look at spending in the second half of the year helped give Wall Street a lift. The Dow Jones industrial average rose more than 155 points in late-morning trading. The rise in spending added to positive reports that Hurricane Irene didn't do as much damage as feared.
Economists said the spending report was a strong sign that the economy rebounded in July after growing at an annual rate of just 0.7 percent in the first half of the year -- the slowest pace since the recession officially ended two years ago.
Consumer spending is important because it accounts for 70 percent of economic activity.
July's spending and income figures "significantly alter the outlook for third-quarter GDP growth," said Paul Dales, a senior U.S. economist for Capital Economics. Dales said growth for the July-September quarter is on track for an annual rate of 2.5 percent, up from his previous estimate of 1.5 percent.
Dales noted that the report measured spending ahead of a sell-off on Wall Street in late July and early August, which may force consumers and business to pull back on spending and investment. The stock market has lost 11 percent of its value since July 21. But even if the early August data are weak, talk of another recession "would seem strange" when the economy appears to be growing more strongly, Dales said.
The economy added 117,000 net jobs in July, twice the number added in each of the previous two months. Spending on retail goods rose faster last month than in any month since March. U.S. automakers rebounded last month to boost factory production by the most since the Japan crisis.
In July, consumer spending rose at a faster pace than income. That means Americans saved less. The savings rate fell to a four-month low of 5 percent, down from 5.5 percent in June.