Other data on Thursday showed the number of Americans filing new claims for jobless benefits held steady last week, indicating a lack of improvement in the labor market and keeping additional monetary stimulus from the Federal Reserve on the table.

The Commerce Department said consumer spending increased 0.4 percent in July after a flat reading in June. Last month's rise in consumption, which accounts for 70 percent of U.S. economic activity, was in line with economists' expectations.

When adjusted for inflation, consumer spending increased 0.4 percent, also the largest increase since February.

"The improvement in spending activity suggests that overall economic activity may be off to a fairly decent start in the third quarter," said Millan Mulraine, senior macro strategist at TD Securities in New York.

Reports from U.S. retailers suggested some of the spending momentum carried into August, with a range of retail outlets - from Costco Wholesale Corp to Limited Brands Inc - posting better-than-expected sales gains.

Separately, the Labor Department said first-time applications for state unemployment benefits were unchanged last week at 374,000. The four-week moving average for new claims, a better measure of labor market trends, rose 1,500 to 370,250.

Jobless claims have risen by 10,000 in August, suggesting some moderation in the pace of job growth after payrolls increased 163,000 in July following a gain of just 64,000 in June.

Even though data on consumer spending and housing suggest that economic activity picked up early in the third quarter, the state of the labor market could determine whether the Fed eases monetary policy further at its September 12-13 policy meeting.

Atlanta Federal Reserve Bank President James Lockhart told CNBC the central bank's decision at that meeting would be a "close call." A Reuters poll of fund managers found that only 44 percent think the Fed will announce a third round of bond purchases in September, down from 70 percent last month.

Investors will look to a speech by Fed Chairman Ben Bernanke on Friday for clues on the central bank's next step.

"The economy does not seem to be faltering or going into reverse," said Chris Rupkey, an economist with Bank of Tokyo-Mitsubishi in New York. "But for a Fed that thinks the economy is not good enough, the economic data today is not consistent with 3 percent-plus growth or a falling unemployment rate."

The jobless rate, which ticked up to 8.3 percent in July, has been stuck above 8 percent for more than three years, the first time this has happened since the Great Depression.

In addition, business spending is weakening and inflation is slowing.

U.S. stocks opened lower, while U.S. Treasury debt prices extended earlier gains. The dollar maintained its losses versus the euro and yen.

INFLATION SUBDUED

Consumer spending dipped 0.1 percent in June when adjusted for inflation and last month's increase was an encouraging sign. In the second quarter, consumption had expanded at the slowest pace in a year, helping to hold back economic growth to a modest 1.7 percent annual rate.

Households were helped last month by subdued inflation.

A price index for personal spending was flat after edging up 0.1 percent in June. In the 12 months through July, the PCE price index rose 1.3 percent -- the smallest increase since October 2009 -- after increasing 1.5 percent in June.

A core measure that strips out food and energy costs also held steady last month for the first time since September, giving the Fed scope to launch another round of bond purchases to drive borrowing costs lower.

In the 12 months to July, the core PCE price index increased 1.6 percent, the smallest rise since October, from 1.8 percent. The Fed aims for inflation of 2 percent.

Household income increased 0.3 percent after rising by the same margin in June. Income available to households after stripping out inflation and taxes increased 0.3 percent after gaining 0.2 percent in June.

With spending a touch above income growth, the saving rate slipped to 4.2 percent in July from 4.3 percent the prior month.

(Editing by Andrea Ricci and Chizu Nomiyama)