U.S. consumers spent more in June and there was positive news on the housing market, but a big drop in incomes pointed to a slow recovery from the worst recession in decades.

Spending rose 0.4 percent in June after a 0.1 percent gain in May, the Commerce Department said on Tuesday, partly because of higher gasoline prices. But after adjusting for inflation, spending -- which accounts for over two-thirds of U.S. economic activity -- fell 0.1 percent after being flat in May.

Savings slipped from a recent rising trend as strapped consumers had to dig deeper to spend.

This is indicative of the state of the economy. As we turn the corner on this recession, we find the economy stabilizing but definitely not resurging. We're going to see fairly soft economic numbers for some time, said Robert Dye, a senior economist at PNC Financial Services Group in Pittsburgh.

U.S. stocks initially fell on the data, but later pushed higher as investors drew some cheer from a report showing pending sales of existing U.S. homes rose for a fifth straight month in June, the first such advancing streak in six years.

The Dow Jones industrial average ended up 33.63 points at 9,320.19, while the Standard & Poor's 500 index gained 3.02 points to 1,005.65. U.S. government bond prices fell, while the U.S. dollar edged up versus the euro.

The housing data bolstered views that the housing market, at the heart of the longest economic downturn since the Great Depression of the 1930s, was starting to dig itself out of a three-year slump and carry the broader economy with it.

While the recession's grip on the economy appears to be slackening, continuing job losses are sapping consumers' willingness to spend and heightening chances that recovery from the recession, now in its 20th month, will be tepid.

Analysts said the sluggish real consumer spending suggested that second-quarter gross domestic product could be revised to show a bigger decline than the 1.0 fall reported last week.

The Commerce Department said personal income declined 1.3 percent in June, as the effects of one-time government stimulus checks, part of the government's $787 billion package to jump-start the economy, wore off.

INCOMES TUMBLE

The drop in personal income was the biggest decrease for any month since January 2005. During June, private wages and salary disbursements decreased $28.6 billion after dropping $11.3 billion in May, the department said.

An independent monthly survey showed on Tuesday that salaries at small U.S. companies were at their lowest level in July since March 2006.

Real disposable income -- money left over after taxes and adjustment for price rises -- tumbled 1.8 percent in June, the largest decline in a year, and savings fell, the Commerce Department said.

The amount of after-tax income Americans stashed away decreased to an annual rate of $505 billion in June from $681 billion in May. The saving rate -- the percentage of disposable income saved -- slipped to 4.6 percent after jumping to 6.2 percent in May.

Some analysts said consumers were most likely done saving for now, adding that government programs such as cash-for-clunkers, aimed at encouraging drivers to trade in old vehicles with higher fuel consumption for new, less thirsty ones, could see households save less in the months ahead.

They said this could boost consumer spending in the third quarter and contribute to growth in overall output. Spending fell at a 1.2 percent rate in the second quarter after rising a modest 0.6 percent in the January to March period.

Fear is subsiding somewhat as this discussion of the end of the recession gets pretty prevalent. Consumers are starting to spend some of the cash they have been hoarding. You are seeing that with automobiles, said Tommy Williams, president of Williams Financial Advisors in Shreveport, Louisiana.

However, sharp downward adjustments to the previous months' income figures -- wage and salary income and dividends -- also meant that the saving rate rose less than previously thought, some analysts said.

(This is) a troubling signal, because it may suggest that there is further adjustment to come. Reduced wealth, high debt, tight credit, and a weakening labor market are all weighing on consumers, said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts.

Consumers remain a missing link in hopes for strong recovery.

In a sign that weak demand is suppressing price pressures, a gauge of inflation closely watched by the Federal Reserve moderated slightly in June. The year-on-year personal consumption expenditures index, excluding food and energy, rose 1.5 percent after a 1.6 percent increase in May, the Commerce Department said.

Separately, the Pending Home Sales index rose 3.6 percent in June, the National Association of Realtors said. Compared to the same period last year, the index, which is based on contracts signed in June, jumped 6.7 percent.

(Editing by xx)

Inflation