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If the economy is rebounding, consumers aren't feeling it.

Despite big job gains over the past two months and tax rebates amounting to some $27 billion, recent consumer confidence surveys have been disappointing. The University of Michigan consumer sentiment index fell to a seven-month low in late May, and the

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poll showed an unusually large drop in confidence in the week ended May 23. Clearly, worries over Iraq and high fuel prices are taking their toll.

But some economists say it's more important to watch what consumers do rather than what they say. Historically, the correlation between sentiment and spending has been quite weak, some experts argue. "Volatile confidence data bear little resemblance to the stable consumption activity of recent years," noted Steven Wieting, senior economist at Smith Barney.

So, what has the consumer been doing recently? Real consumer spending increased just 0.2% in April after a revised 0.3% gain in March. That's disappointing, given that personal income grew in April at its fastest pace in five months.

This trend has carried over from the first quarter, when wages and salaries rose at an annual pace of 5.6% but discretionary spending, which excludes medical care, energy and food, increased at an annual rate of less than 3%. The disparity between income and spending pushed the national savings rate up to 2.4% in April, the highest since August.

"This may be the start of a new trend towards household balance sheet repair," said David Rosenberg, chief economist at Merrill Lynch.

Over the past two years, consumers have helped to support the economy by purchasing homes, cars and appliances on credit. Ultra-low interest rates helped fuel spending growth despite a downturn in the labor market.

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But the spending binge has left many consumers with heavy debt loads, and while the job market has shown signs of improvement recently, interest rates are also poised to move higher, leading many consumers to save money rather than spend it.

"It does appear that consumers exercised some greater restraint in spending in April, reflecting the impact of a drop-off in refinancing and leveling off in confidence" said Lynn Reaser, chief economist at Banc of America.

Reaser said she expects consumer spending to grow at a slower rate than the overall economy for the rest of 2004. Still, she is forecasting a 3% rise in spending this year, as payrolls increase and wages rise further. The improvement in the job market should more than offset the rise in energy costs, which only account for about 7% of household spending, she said.

Drew Matus, an economist at Lehman Brothers, said a reduction in spending actually bodes well for long-term consumption trends.

"In the long run, it's probably healthier if you have consumers recognizing that interest rates are going to be moving higher and adjusting their savings rate accordingly," he said. "That means that as we get further into the recovery and rates really start moving higher, it puts less pressure on the consumer and requires less drastic cutbacks."

Like Reaser, Matus believes that rising employment should keep consumer spending afloat this year, and he is looking for 3.5% growth compared with 4% last year.

While an improving labor market would be good for household spending, it would have a couple of negative consequences for the economy: It would push inflation higher and could hurt corporate profits.

Already, earnings have showed signs of slowing down. In the first quarter, profits rose 1.2% from the previous quarter, which was well below the 7.2% growth in fourth-quarter earnings and 9.9% increase in third-quarter profits. On a year-over-year basis, however, earnings were still up 31.6%, according to the Commerce Department.

U.S. businesses have boosted profits by cutting expenses and keeping wages and head count low. As the environment for jobs improves, worker productivity will likely slow down, and earnings will be squeezed.

Rising wages also are expected to send inflation higher this year, although recent data suggest that isn't a problem so far. On Friday the Commerce Department said the personal consumption expenditure price index rose just 0.1% in April, the lowest reading since November.

"While the year-over-year growth rate has rebounded to 1.4% from a secular low of 0.8%, such a rebound hardly seems the inflation crisis that so many voices make it out to be," said Wieting.