WASHINGTON - Consumer spending rose for a second straight month in November as incomes recorded their biggest gain in six months, but a surprise drop in new home sales was a reminder that the economic recovery would be bumpy.

The Commerce Department said on Wednesday spending increased 0.5 percent last month after rising 0.6 percent in October. Analysts had expected consumer spending, which normally accounts for more than two-thirds of U.S. economic activity, to rise 0.6 percent in November.

Sales of newly built U.S. single-family homes unexpectedly dropped 11.3 percent last month to a 355,000 unit annual rate, the department said in a second report. Markets had expected new home sales to increase to 440,000 units.

It's clearly a disappointing number, but I don't know that it changes the outlook all that much. You're going to get bumps along the road every so often as far as recovery is concerned, Nick Bennenbroek, head of currency strategy at Wells Fargo in New York, said of the housing data.

U.S. stocks fell on the housing report, giving up earlier gains, while prices for government debt rallied.

Another report showed consumer sentiment improved this month from November on some income growth and less gloomy job conditions.

The Reuters/University of Michigan Surveys of Consumers said the final December reading on the index of consumer sentiment was 72.5, the highest since September. It was up from 67.4 in November and 60.1 a year ago.

With sentiment improving, households are starting to feel a bit more comfortable spending after a long period of restraint following the most painful U.S. recession in 70 years and this is feeding financial market expectations that the economy will steadily improve in 2010.

We are getting back on track. This is a report that builds on the retail sales we saw, and we are closing the gap on jobs. Income growth will help stabilize the economy, Robert Brusca, chief economist at Fact and Opinion Economics in New York, said of the income and spending report.

CHUGGING ALONG

The Federal Reserve last week left overnight lending rates unchanged near zero, citing excess slack in the economy, and pledged to keep interest rates low for an extended period.

In an interview with ABC's Good Morning America on Wednesday, Treasury Secretary Timothy Geithner said the economy was recovering, but it may be some months yet before jobs are being created instead of lost.

The economy's growing, it's getting better, getting stronger and I think most people would say the economy is strengthening going into the end of the year...but the key thing is when do we get job growth back, Geithner said.

Analysts were little worried about the drop in new home sales in November.

New home sales are such a small part of the overall housing market that it's not an important indication of the health of the housing sector, said Pierre Ellis, senior economist at Decision Economics in New York.

Inventories are under control despite the weaker sales picture so there is no threat to production of new houses. The production side of the market is in good balance with the demand side.

A Realtors survey on Tuesday showed sales of previously owned home surged to their highest level in nearly three years last month, while the decline in prices was starting to fade.

But in further evidence that the housing recovery is uneven, on Wednesday a separate report showed demand for U.S. home loans fell sharply last week to the lowest level in almost two months even though mortgage rates held steady below 5 percent.

(Reporting by Lucia Mutikani; Additional reporting by Glenn Somerville in Washington and Richard Leong, Lynn Adler, Steven C. Johnson and Ellen Freilich in New York; Editing by Andrea Ricci)

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