U.S. consumer spending appeared to grow at a fairly healthy pace halfway through the third quarter, pointing to solid domestic demand that could persuade a cautious Federal Reserve to hike interest rates on Thursday.

Other data on Tuesday, however, showed manufacturing continuing to struggle under the weight of a strong dollar and softening global demand. Factory activity in New York state contracted in September for a second straight month.

"Today's data are positive news for final demand in the third quarter and should give the Fed more confidence in the spending outlook," said Laura Rosner, an economist at BNP Paribas in New York. 

The Commerce Department said retail sales excluding automobiles, gasoline, building materials and food services increased 0.4 percent in August after an upwardly revised 0.6 percent increase in July.

These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product and were previously reported to have increased 0.3 percent in July. It was the latest indication of sturdy economic momentum and suggested the recent stock market sell-off had little immediate impact on consumer spending.

Signs of sustained strength in the economy could encourage the U.S. central bank to raise its benchmark overnight interest rate from near zero. The Fed's policy-setting committee meets on Wednesday and Thursday against the backdrop of a tightening U.S. labor market, low inflation and slowing global growth.

U.S. financial markets have sharply dialed down expectations of a rate hike in the wake of the recent volatility in global equity markets and are now pricing in a 25 percent probability that the Fed will announce a rate hike this week.

Data ranging from employment to housing have suggested the U.S. economy retained most of its momentum from the second quarter, when output expanded at a 3.7 percent annual pace. Consumer spending grew at a 3.1 percent rate during the same period.

U.S. stock index futures and prices for U.S. Treasuries fell after the data, while the dollar edged up against a basket of currencies.



Overall retail sales rose 0.2 percent last month as strong gains in auto sales were offset by a 1.8 percent drop in the value of sales at service stations due to a decline in gasoline prices.

Retail sales increased by an upwardly revised 0.7 percent in July. Economists polled by Reuters had forecast retail sales increasing 0.3 percent in August after a previously reported 0.6 percent rise in July.

Receipts at auto dealerships rose 0.7 percent last month after rising 1.3 percent in July. Sales at clothing stores were up 0.4 percent, while receipts at building materials and garden equipment stores were down 1.8 percent. Sales at furniture stores fell 0.9 percent.

There were sales increases for online retailers, restaurants and bars, sporting goods and hobby stores, and electronics and appliance outlets.

In a separate report, the New York Fed said its Empire State general business conditions index was -14.7 in September, barely changed from -14.92 in August, which had been its lowest level since April 2009. A reading below zero indicates contraction.

The August and September levels marked the first back-to-back contractions since a six-month run in negative territory between August 2012 and January 2013.

Manufacturing, which accounts for about 12 percent of the U.S. economy, has been stymied by the buoyant dollar, faltering global demand and lower oil prices. 

By Lucia Mutikani - Reuters (Additional reporting by Dan Burns; Editing by Paul Simao)