U.S. consumers kept spending in July, even as their incomes were flagging.

“Personal income stayed flat in July, but expenditures rose by 1.0%, which BMO Nesbitt Burns notes is the quickest advance since October 2001. “While there are concerns about incomes, U.S. consumers spending habits continue to respond to financial incentives,” it says. “The automakers re-introduction of zero-interest rate incentive programs again drew great interest, helping to spur durables spending upward by 3.9%, on top of a 1.9% advance in June. Given the burst of consumer activity, and the anemic growth of disposable income, it comes as little surprise that the savings rate fell sharply in July, to 3.4% from 4.2% in June.”

BMO notes that personal income has advanced by 3.0% from year-ago levels, but that this is quite low historically, and well below the 5% annual growth in spending. “In fact, the growth of consumer spending has consistently outpaced the expansion of personal income since April 2001. While this was a key factor helping to maintain economic growth during the downturn, the trend is not sustainable.”

RBC Financial Group economists say that the data is worrisome even though it means people are out spending in the economy. “Confidence has been fragile of late and weak income growth will make consumers think twice about spending in August and into Q3, especially given the volatility in stock markets. Weak income growth leaves the consumer sector on weak footing for the second half at a time when they alone are supporting the U.S. economy.”

Although, RBC notes that, “One consolation is that this level of spending may help firms decide to begin hiring and investing again, that way kicking off a virtuous cycle of growth going into the second half of 2002. Keep your fingers crossed.”

Also out in the U.S. today, RBC notes that the final reading of U.S. consumer sentiment for August was revised down to 87.6 from the preliminary reading two weeks ago of 87.9. And, the Purchasing Manager’s Index for the Chicago area, a good gauge of the health of industrial activity in that large region, rose to 54.9 in August from 51.5 in July.

“U.S. consumers continued to do their part to spur economic growth in July,” offers BMO. “However, spending at such a pace cannot be sustained, given the sluggish growth in personal incomes.”