WASHINGTON : Americans spent freely for a second straight month in July, driving their personal savings rate down to the lowest level on record, the government reported Thursday.

The Commerce Department said that consumer spending rose 1 percent, matching the strong June increase. Both months saw spending driven higher as consumers flocked to auto showrooms to take advantage of attractive incentive offers automakers were using to reduce a backlog of unsold cars.

Incomes rose a smaller 0.3 percent in July, down from a 0.5 percent gain in June. The combination of a surge in spending and slower income growth sent the personal savings falling to a minus 0.6 percent, the lowest level since the government began keeping these records in 1959.

Reports from the U.S. big chain stores indicated that consumer sales remained strong in August despite soaring gas prices. A diverse group of retailers from warehouse clubs like Costco Wholesale Corp. to teen retailers such as Wet Seal Inc. reported on Thursday that they had enjoyed solid sales in August.

Meanwhile, a closely watched gauge of manufacturing activity lost altitude in August as rising energy prices sapped optimism in the nation's factory sector.

The Institute of Supply Management said its manufacturing index declined to 53.6 percent in August, down from July's reading of 56.6. While a reading above 50 percent indicates manufacturing is continuing to expand, the August reading was below what economists had been expecting. It was likely to raise new concerns about future prospects for manufacturing, the sector that was hardest hit by the 2001 recession.

On Wall Street, the Dow Jones industrial average fell 21.97 points to close at 10,459.63 as consumers grappled with the disappointing economic reports and the latest news of Katrina's damage.

In other economic news, the Labor Department said that the number of Americans filing new claims for unemployment benefits rose by 3,000 last week to a seven-week high of 320,000. Those claims numbers are expected to rise significantly in the weeks ahead as laid-off workers in New Orleans and other states hit by Hurricane Katrina file claims.

The government also reported Thursday that construction spending was flat in July following a sharp 0.6 percent drop in June, giving a possible indication that one of the economy's strongest sectors may be starting to slow under the impact of rising interest rates.

The June decline, which was revised down from an original estimate of a 0.3 percent drop, was the biggest setback since a 1.7 percent drop in January 2004.

Economists had expected July construction activity to post a solid rebound following the June weakness but a big 0.8 percent drop in public construction, the second consecutive decline, offset a 0.2 percent rise in private construction activity.

Private residential construction, which had fallen by 0.2 percent in June, recapped those losses with a 0.2 percent increase in July. Spending on construction of hotels, shopping centers and health care facilities showed solid gains. Governments spent less on housing, office buildings and highways and streets in July.

Economists have new concerns about how strongly consumer spending will grow in the future given a new surge in energy prices that has accelerated this week following the loss of production facilities along the Gulf Coast in the wake of the devastation from Katrina, expected to be the costliest natural disaster in the country's history.

Before Katrina struck, economists had been expecting that economic growth would accelerate in the current July-September quarter at a red hot pace of around 4.5 percent.

However, analysts are now slashing those estimates by 1 percentage point or more, believing that the surge in gasoline prices will lower the amount of money consumers have to spend on other products. Consumer spending accounts for two-thirds of total economic activity.

Another concern is how long consumers can keep spending, given how low the savings rate has fallen.

The drop to a negative 0.6 percent savings rate mean that consumers actually dipped into savings to finance their spending in July.

The savings rate is the amount of disposable income, if any, that is left after spending and tax payments are subtracted.