Consumer spending was weak for a fourth straight month in June as rising gasoline prices left Americans with little to spend on other items. Construction activity posted a stronger–than–expected advance, though, as a record level of government spending helped offset weakness in housing.

The Commerce Department reported that consumer spending rose by 0.4% in June, down from a gain of 0.6% in May. After adjusting for inflation, the gain was an even weaker 0.2%, the fourth straight month of a spending increase of 0.2% or less.

Meanwhile, construction spending rose by 0.3% in June to a record $1.22 trillion at a seasonally adjusted annual rate. The strength came from big gains in government construction and commercial building activity. Housing construction fell for a third straight month.

In a third report, the Institute for Supply Management said that its closely watched gauge of manufacturing activity posted a reading of 54.7 in July. That was a better–than–expected showing and followed a reading of 53.8 in June.

Income growth rose a solid 0.6% in June, following a 0.4% increase in May. A measure of inflation closely watched by the Federal Reserve rose by 0.2% in June and was up 2.4% over the past year, the biggest gain in 11 years.

The 0.3% rise in construction spending was stronger than the 0.1% advance analysts had forecast. The strength came from a 0.8% rise in government construction activity, reflecting a 0.9% increase in state and local building projects, which rose to a record $255.3 billion at an annual rate. That offset a 0.7 % drop in federal construction spending, which fell to a rate of $17.2 billion.

However, economists still expect construction activity to weaken in coming months, reflecting a slowdown in housing. For June, housing construction dropped by 1% as builders struggled to deal with a backlog of unsold homes, reflecting this year’s jump in mortgage rates. Consumer spending accounts for two-thirds of total economic growth and the slowdown in this area was a big factor in the slowing of the overall economy in the spring to a growth rate of just 2.5 %, less than half the 5.6 % pace of the first quarter.

The healthy jump in incomes and the sluggish rise in spending were both in line with Wall Street expectations.

Analysts said they expect rising interest rates, soaring energy prices, and a cooling housing market to further depress consumer spending and overall economic growth in coming months.

“U.S. economic growth is slowing and this should apply a damper on inflation pressures, but not before measured inflation creeps up a bit further,” a senior economist at BMO Capital Markets, Michael Gregory, said.

The Federal Reserve is hoping to slow the economy enough to keep inflation under control. However, the new report showed the opposing forces facing the central bank. While consumer spending and the overall economy are slowing, inflation is getting worse.

An inflation gauge preferred by the Fed, which is tied to personal spending, showed an increase of 0.2% in June, excluding food and energy. Over the past year, that gauge is up by 2.4%, an increase matched by a similar rise for the 12 months ending in September 2002. That figure has not been exceeded since a 2.5% increase for the 12 months ending in April 1995.

The 2.4% rise is well above the Fed’s comfort zone of 1% to 2% for core inflation, which excludes volatile energy and food. Financial markets have rallied in recent weeks on a growing belief that the slowing economy will allow the central bank to call a halt in its twoyear campaign to raise interest rates to keep inflation under control.

The Fed meets again next Tuesday, with economists split over whether policy-makers will boost rates for an 18th consecutive time or take a pause to assess how the previous rate increases are impacting the economy. The latest report showed that Americans’ after-tax incomes rose by 0.6% in June, or 0.4% once inflation is removed.The inflationadjusted increase was an improvement from four months in which disposable income has been unchanged or posted tiny increases of 0.1%.