Americans' income grew more in July than it has at any time in five years, while the nation's beleaguered housing industry continued to dig out from the worst of the recession, the government said yesterday.

The 1.4 percent -- or $28.6 billion -- increase in personal income was the largest since a 2 1/2 percent jump in June 1975 when the nation was in the grip of its last recession.

But a huge chunk of the increase was due to higher government payments to Social Security recipients, who received a 14.3 percent cost-of-living hike last month, the Commerce Department said.

Benefits to victims of black lung and factory workers thrown out of work by foreign competition also were up significantly.

Excluding Social Security and otherso-called transfer payments, personal income rose a modest $6.6 billion in July, compared with a $10.9 billion increase the month before, the CommerceDepartment said.

Overall, personal income stood at a seasonally adjusted annual rate of $2.117 trillion last month. This worksout to $8,040 for every man, woman and child in the United States.

In another report, the Commerce Department said housing starts increased 4.8 percent to a seasonally adjusted annual rate of 1.267 million units in July. It was their highest point since the recession began in February.

It was also the second straight monthof increased activity for the housing industry. In June, starts were up a whopping 33.3 percent, the department said in a revision.

Building permits, a harbinger of futrre homebuiling activity, also grew 15 percent last month to an annual rate of 1.24 million units, the department said. In June, permits increased a revised 30.6 percent.

Despite the improvement in both categories, housing industry analysts pointed out construction still is running 28.2 percent below its pace of 1.76 million units a year ago. And they said there are potential storm clouds on the horizon.

After declining dramatically in the late spring and early summer, mortgage interest rates have begun to climb again, rising about 2 percentage points in the last seven weeks. They now havepassed the 13 percent mark.

"Unless the recent, sharp increases in mortgage interest rates are reversed soon, what recovery there has been so far could be nipped in the bud in the next several months," Merrill Butler, president of the National Association of Homebuilders, said.

In other economic news:

The Commerce Department said personal consumption expenditures grew by $27 billion -- or 1.7 percent --in July, following a $13.2 billion -- or 0-8 percent -- increase in June.

This in an encouraging sign for the economy, because Americans will have to begin spending again if the country is to start recuperating from its seventh economic downturn since World War II.

The Federal Reserve Board reportedthe nation's factories operated at only 74.2 percent of capacity in July, the lowest level in five years. The 1.6 percentage point drop in operating capacity in July -- from 75.8 percent in June -- represented the sixth straight month of decline, the nation's central bank said.

That still remains above the low of 69 percent use registered during the nation's last recession in 1975.

Low use of factories occurs as ordersdecline. This, in turn, forces manufacturers to cut back production, use up inventories and either stop hiring or actually lay off workers.

Unemployment in July stood at 7.8 percent, and many economists expect that rate to reach 8 1/2 percent before year's end.

For manufacturing industries, the drop in operating rates continued to be widespread in July, the Federal Reserve said.

Primary processing industries cut back their activity 1.8 percentage points to 70.8 percent of capacity; the rate for advanced processing industries declined 1.3 percentage points to 76.3 percent of full use.

For iron and steel, capacity utilization in July was about 55 percent, the lowest rate since August 1971, the Federal Reserve said.