Retail sales, which had taken a sharp plunge in June, rebounded by 0.7 percent last month as attractive sales incentives lured shoppers back into new-car showrooms.

The Commerce Department (search) reported Thursday that the gain in retail sales last month followed a revised 0.5 percent decline in June.

While the July rebound was smaller than the 1 percent advance that many economists had been expecting, the 0.5 percent June drop was revised upward from a much worse 1.1 percent decline that the government had originally reported.

The July increase was led by a 2.4 percent jump in auto sales which followed a 3 percent drop in June. Auto dealers, alarmed by the sharp fall-off, reinstituted attractive dealer-financing incentives that lured buyers back.

The strength in July provided hoped-for evidence that the economy was coming out of what Federal Reserve Chairman Alan Greenspan (search) termed a "soft patch" in June, when a variety of economic indicators suddenly weakened.

Still, analysts said the economy is not out of the woods. They noted the report last week that the economy was able to create only 32,000 jobs in July, far below the 200,000-plus that many analysts had been expecting.

If job gains do not increase, the fear is that Americans won't have the incomes to support increased spending.

President Bush, campaigning for re-election, is counting on a strong economy to convince voters that his economic policies are working.

However, Sen. John Kerry, his Democratic challenger, contends that Bush is pursuing a failed economic policy that has produced the worst jobs record of any president since Herbert Hoover (search). That performance has produced a "middle-class squeeze" for most Americans of falling wages and soaring costs for health care, education and energy, Kerry has argued.

In another report Thursday, the Labor Department (search) said the number of people filing first-time claims for unemployment benefits fell by 4,000 last week to 333,000, a five-week low and a sign that the labor market in August may be improving after a disappointing July.

If auto sales were excluded, retail sales would have risen by a more modest 0.2 percent in July following a 0.3 percent increase in June.

In addition to autos, other areas where sales posted advances included furniture stores, up 1.1 percent; general merchandise stores, up 1 percent; sporting-goods stores, up 1.3 percent and restaurants and bars, up 0.6 percent.

Stores suffering sales declines last month included gasoline service stations, which fell by 0.5 percent, building supply stores, where sales dropped 1.1 percent, and health and personal care stores, where sales dropped 0.3 percent.

The Federal Reserve this week boosted a key interest rate by a quarter-point, the second such move this year, in an effort to make sure the rebounding economy does not generate inflation down the road. Fed officials have said they believe the summer pause in economic activity will only be temporary and not a harbinger that the recovery is about to stall.