Consumers' spending slowed in July, rising by the smallest amount in nine months, even as tax-rebate checks helped push up their incomes.

The Commerce Department reported Thursday that consumer spending, which accounts for two-thirds of all economic activity, increased by an expected 0.1 percent. That was the smallest gain since October and represented a pullback from June's 0.5 percent increase.

Americans' incomes, which include wages, interest and government benefits, however, rose by 0.5 percent in July, the largest increase since December. In June, incomes rose by 0.4 percent.

Economists had predicted that consumers, a key force keeping the economy afloat, would tighten their belts in July even as the tax-rebate checks began to flow. The main reason for more cautious spending, economists say, is that people are worried about holding onto their jobs in the face of mounting layoffs and the sour economy.

The spending and income figures aren't adjusted for inflation.

In an effort to avert a recession, the Federal Reserve has slashed interest rates seven times this year and some analysts say another rate cut is likely in October.

In July, spending on durables -- costly manufactured goods expected to last at least three years, such as cars and washing machines -- fell by 1.1 percent, following a 2.3 percent increase the month before.

Spending on nondurables, such as clothes and foods, edged down by 0.1 percent in July for the second month in a row.

Spending on services rose by 0.4 percent for the second straight month. The services category includes gas and electric utilities, visits to doctors, bus and train fares and rent for housing.

Americans' disposable incomes rose by 1.7 percent in July, following a 0.3 percent gain.

Incomes were bolstered by the tax rebates, lower tax rates and a special one-time payment to correct underpayments of benefits associated with an error in the calculating Social Security and Supplemental Security Income benefits, the government said. Excluding these factors, disposable income increased 0.3 percent in July, the same as in June.

With income growth outpacing spending, the nation's personal savings rate -- savings as a percentage of after-tax income -- rose to 2.5 percent in July, the highest since June 1999.

Economists say the savings rate doesn't provide a complete picture of household finances because it doesn't capture gains realized from such things as higher real-estate values or from financial investments.

In another report, the Labor Department said the number of workers filing new claims for state unemployment insurance last week fell by 1,000 to 399,000. But the more stable four-week moving average of claims, which smoothes out weekly fluctuations, rose by 12,500 to 393,000, suggesting that some workers are having trouble holding on to their jobs.