New orders for long-lasting U.S. manufactured goods edged higher in December and the number of workers filing applications for jobless aid fell last week, indicating the economy remains on a recovery path.

The Commerce Department said on Thursday durable goods orders rose 0.3 percent last month, held back by a surprise drop in civilian aircraft orders that analysts saw as temporary. The gain lagged economists expectations for a 2 percent rise.

Details of the report were much stronger, however, with a proxy for business spending plans -- non-defense capital goods orders excluding aircraft -- increasing a solid 1.3 percent.

On the jobs front, the Labor Department reported that initial claims for state unemployment benefits dropped 8,000 to 470,000 last week, less than economists had expected, after rising for three weeks in a row.

We remain on track, but it's not a strong, strong recovery that would be consistent with the big downturn, said Kurt Karl head of economic research at Swiss Re in New York.

Economists took encouragement from the orders for durable goods, those meant to last at least three years.

Businesses are now feeling confident enough to deploy a larger portion of the recent strong corporate earnings rebound into new investment spending, said Brian Bethune, chief U.S. financial economist at IHS Global Insight in Lexington, Massachusetts.

While economists saw the day's data as having little impact on perceptions of an economy steadily recovering from the worst downturn since the 1930s, investors took a different view.

U.S. stock indexes fell sharply, also weighed by the weak outlooks from tech firms Qualcomm Inc and Motorola Inc . The fall in stocks revived demand for the least risky U.S. government bonds, lifting prices for short-dated Treasuries.


But even as declines in housing sales in December reported earlier this week hinted at renewed weakness in the housing market and cast a cloud on the economy's recovery, the fourth quarter is seen having grown.

The government's report on fourth-quarter gross domestic product on Friday is expected to show the economy expanded at a 4.6 percent annual pace as businesses liquidated inventories less aggressively and in some cases started rebuilding stock.

The economy grew 2.2 percent in the third quarter.

The Federal Reserve on Wednesday painted a cautiously optimistic picture of the economy and stuck to its promise to keep interest rates near zero percent for an extended period to ensure a sustainable recovery.

Stubbornly high unemployment is overshadowing the recovery. On Wednesday, President Barack Obama in his annual State of the Union address said, Jobs must be our number one focus in 2010.

Economists had forecast a much bigger decline in new claims for jobless benefits last week, seeing a drop to 450,000, compared with the 470,000 reported on Thursday by the Labor Department. That was down from 482,000 for the prior week, which had been elevated due to a backlog of applications from the holidays.

The report showed the four-week moving average for new jobless claims, a better measure of underlying trends, rose for the second week after 19 weeks of decline.

The progress in the labor markets is painfully slow. The economy is not creating sufficient jobs to quickly reduce the unemployment rolls, although the pick-up in the manufacturing sectors will help, said Keith Springer, president of Capital Financial Advisory Services in Sacramento, California.

Civilian aircraft bookings fell 38.2 percent last month, building on a 40.0 percent drop in November, the Commerce Department said. Plane maker Boeing said in December it had received 59 orders, up from November's nine, and analysts had expected that to lift the government's measure of orders.

Analysts expect the Boeing orders to be reflected in the report for January.

Durable goods orders are a leading indicator of manufacturing activity, which in turn provides a good measure for overall business health.

New durable goods orders excluding transportation rose 0.9 percent last month after increasing 2.1 percent in November, the department said, beating market expectations for a 0.5 percent gain.

Shipments, which go into the calculation of gross domestic product, surged 2.9 percent last month -- the biggest rise since July. They rose 0.8 percent in November. Analysts said strong shipments raised the risk that fourth-quarter GDP could exceed market expectations.

For a graphic on U.S. durable goods, see

(Additional reporting by Doug Palmer in Washington; Editing by Leslie Adler)