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Rising home prices show traction in U.S. housing recovery

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U.S. single-family home prices rose for the fourth month in a row in May when adjusting for seasonal swings, suggesting the recovery in the housing market continued to gain traction.

Other data on Tuesday showed spending by American consumers fell in June for the first time in nearly a year when accounting for inflation, underscoring the recent loss of momentum in the broader economy.

The S&P/Case Shiller composite index of 20 metropolitan areas gained 0.9 percent in May on a seasonally adjusted basis, topping economists' expectations for a 0.5 percent gain.

On a non-seasonally adjusted basis, prices fared even better, jumping 2.2 percent.

The rate of decline on a yearly basis moderated, with prices down 0.7 percent compared to a 1.9 percent drop in April.

The housing market, which collapsed during the 2007-2009 recession, has been a relative bright spot in the economy this year, although it remains hobbled by a glut of unsold homes.

"Real estate continues to show improvement off the bottom. That's one of the few encouraging signs we've seen," said Subodh Kumar, an investment strategist at Subodh Kumar & Associates in Toronto.

Groundbreaking on new U.S. homes, for example, rose in June to its fastest pace in over three years.

But since housing makes up a smaller share of the economy than before the recession, it can provide only a limited lift to the broader recovery.

The U.S. economy has looked much more wobbly of late, and if the recovery sputters further, housing also would suffer.

Consumer spending, which makes up about 70 percent of U.S. economic activity, fell 0.1 percent in June when adjusted for rising prices, the Commerce Department said in a separate report.

"Consumers are afraid," said Matthew Lifson, an analyst at Cambridge Mercantile Group in Princeton, New Jersey. "This data suggests that the U.S. economy is stagnant overall and it's just muddling."

Before making price adjustments, spending was flat. That was just below the median forecast in a Reuters poll of 0.1 percent increase.

Pressure is rising on policymakers at the U.S. Federal Reserve to do more to help the sputtering U.S. economy. The faltering recovery also weighs on President Barack Obama's hopes of reelection in November.

The Commerce Department had already reported that economic growth slowed over the entire second quarter as consumers spent at their slowest pace in a year. But Tuesday's data showed consumer spending lost momentum throughout the period when taking inflation into account.

U.S. household income rose in June by 0.5 percent -- the most in three months -- although consumers socked away part of the extra cash by saving more.

Analysts had expected a gain of 0.4 percent. After tax income climbed 0.3 percent in June when accounting for higher prices.

With price-adjusted incomes rising in June and consumption falling, the saving rate for households rose to 4.4 percent, its highest level in a year.

"Consumers are spending cautiously," said Gary Thayer, an economic strategist at Wells Fargo Advisors in St. Louis. "There's still a lot of uncertainty about the job situation."

Upscale leather goods maker Coach Inc. reported another quarter of slowing growth in North America, its top market, hurt by the deals it needed to offer price-conscious shoppers to get them into its outlet stores.

A report on Friday is expected to show the jobless rate holding at 8.2 percent in July. It has been above 8 percent since February 2009 -- nearly all of Obama's time in office so far.

On Tuesday, policymakers at the U.S. Federal Reserve were to start a two-day meeting where Fed Chairman Ben Bernanke has said they would be looking for signs of any stall in the recovery of the labour market.

No major policy announcement is expected although some economists think the Fed this week could push further into the future its conditional pledge to keep rates near zero through late 2014.

Inflation pressures appear to be muted.

A price index for personal spending rose 0.1 percent in June. In the 12 months through June, the PCE index was up 1.5 percent, matching May's reading which was the lowest since January 2011 and below the Fed's target of 2 percent.

So-called core PCE, which removes volatile food and energy prices, rose 1.8 percent in the 12 months through June.

Also pointing to modest inflation pressures, the Labour Department said labor costs rose moderately in the second quarter.

The Employment Cost Index, which measures total employer compensation costs, increased 0.5 percent after rising 0.4 percent in the first three months of the year.

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