U.S. consumer spending was unexpectedly flat in April, but real disposable incomes recorded their biggest increase in nearly a year as the labor market improved and inflation remained muted, a government report showed on Friday.

KEY POINTS: * The Commerce Department said spending was the weakest since September, when it fell 0.6 percent, after increasing by an unrevised 0.6 percent in March. * Analysts polled by Reuters had expected consumer spending, which normally accounts for over two-thirds of U.S. economic activity, to increase 0.3 percent last month. * Spending adjusted for inflation was also flat in April after a 0.5 percent increase the prior month, the Commerce Department said. * Personal income rose 0.4 percent, the report showed, after rising by the same margin in March. * Markets had expected income to rise 0.5 percent last month. * Real disposable income rose 0.5 percent in April, the largest increase since May, after a 0.3 percent gain the prior month. * The saving rate rose to 3.6 percent from 3.1 percent in March. * The personal consumption expenditures price index, excluding food and energy, rose 1.2 percent in the 12 months to April, the smallest rise since September.

COMMENTS:

PIERRE ELLIS, SENIOR ECONOMIST, DECISION ECONOMICS, NEW YORK:

The personal income report is good news in the sense that it's fully supported by the rise in wage and salary income in line with what we expected after seeing the employment numbers. The consumption results are a little bit soft, but set off no alarm bells yet. The core PCE price index comes in on track, still a concern for FOMC doves, but no more so than it was last month. It's at the low-end of the so-called comfort zone so that worries about deflation are not being put at ease.

RICHARD DEKASER, PRESIDENT, WOODLEY PARK RESEARCH, WASHINGTON:

We have had a lot of volatility in retail sales in recent months. We have had moderate growth in consumer spending. Income and wealth are improving, but there are still a lot of headwinds with credit conditions still very tough.

If we see jobs stall out after recent encouraging gains, it would be the single biggest threat to consumer spending and raise questions about the sustainability of the recovery.

While the elevated level of layoffs is discouraging, it's not persistent enough or big enough to change my fundamental view that employment trend remains on an upswing.

SEAN SIMKO, FIXED-INCOME PORTFOLIO MANAGER, INVESTMENT

MANAGEMENT COMPANY SEI, OAKS, PENNSYLVANIA:

I think the consumer is going down the right path of recovery. This data today came in a little bit softer than expectations and might have gone one step backward, but that is to be expected in any recovery.

As the labor market heals, consumer spending should remain strong.

WAYNE KAUFMAN, CHIEF MARKET ANALYST, JOHN THOMAS FINANCIAL, NEW YORK:

Spending was down a little, which will disappoint some people, but I don't think the number is so bad. If people save a little and repair their balance sheets, that's going to be good. Debt has been such a big problem that I don't think this a bad thing. Income came in as expected and overall I'd say the numbers were in line.

For the market, we want to see if there's any follow-through for the rally we had yesterday. Volume was below average, only 84 percent of 10-day average volume, suggesting that this could be a corrective rally in a downtrend. The question is whether we go into a sustained rally from here.

MARKET REACTION: STOCKS: U.S. stock index futures little changed after data. BONDS: U.S. Treasury debt prices slightly extend gains. DOLLAR: U.S. dollar holds slim gains versus euro.

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