WASHINGTON - New U.S. home sales hit their highest level in 10 months in July and orders for long-lasting manufactured goods surged, fresh evidence a modest economic recovery was taking shape.

The Commerce Department on Wednesday said sales of new single-family homes rose 9.6 percent from June to a 433,000 annual pace, the highest rate since September.

It was the biggest percentage gain since a matching increase in February 2005 and reduced the supply of unsold homes on the market to its lowest level in more than 16 years, another indication that housing activity had stabilized after a three-year slump.

In another report, the department said a surge in demand for aircraft pushed durable goods orders up 4.9 percent in July, the largest advance in two years.

Big ticket items are displaying very normal recovery patterns, signaling that the early phase of this recovery may be stronger than people are anticipating, it doesn't mean it will be sustained, said Stephen Gallagher, chief U.S. economist at Societe Generale in New York.

The reports were the latest in a series hinting that the worst slump in 70 years has probably ended or is close to ending, though recovery will be hobbled by sluggish consumer demand owing to high unemployment.

Highlighting the tight squeeze on household incomes, a survey on Wednesday showed Americans will cut their Labor Day holiday plans dramatically this year to save money.

Stocks on Wall Street were little changed, pausing after recent strong gains, while U.S. government bond prices fell marginally on the data.


Reports ranging from home sales to factory activity continue to paint a fairly upbeat picture for an economy that slipped into recession in December 2007. Policymakers are also seeing signs of recovery.

On Wednesday, Federal Reserve Bank of Atlanta President Dennis Lockhart said the economy was in the early stages of recovery, but it would be a while before growth started to bring down unemployment.

There was yet another boost for the housing market, with mortgage applications rising for a second straight week and demand for home refinancing loans increasing to its highest level since early June.

An independent report on Tuesday showed prices for single-family homes climbed for a second straight month in June. Last week, the National Association of Realtors reported sales of previously owned homes in July rose to their highest in nearly two years.

However, there are fears the housing recovery could falter if the government's tax credit of up to $8,000 for first-time homebuyers is not extended when it expires at the end of November.

The question hanging over this report and other recent good news about housing is the impact of the tax credit for first-time homebuyers. After the credit expires, sales, starts, and prices will take a hit. The big unknown is how big this hit will be, said Patrick Newport, a U.S. economist at IHS Global Insight in Lexington, Massachusetts.

The inventory of homes available for sale in July fell 3.2 percent to 271,000 units, the lowest since March 1993, the department said. July's sales pace left the supply of homes available for sale at 7.5 months' worth, the lowest since April 2007.


A surge in civilian aircraft orders at Boeing, boosted orders for long-lasting U.S.-made goods in July. The government's cash-for-clunkers program, which gave buyers a discount to trade-in their old gas-guzzlers for new fuel efficient vehicles, lifted auto orders.

New orders for transportation equipment jumped 18.4 percent, the biggest increase in three years, while capital goods orders rose 9.5 percent in July --- the largest gain since December 2007, the department said.

Still, new orders excluding transportation climbed 0.8 percent in July for the first successive three-month advance since the first quarter of 2006. Even more encouraging, shipments increased 2 percent after rising 0.7 percent in June.

But there was some disappointment as non-defense capital goods orders excluding aircraft -- a closely watched proxy for business spending -- slipped 0.3 percent in July after rising 3.6 percent the prior month.

Durable goods orders are a leading indicator of activity in manufacturing, which in turn provides a good barometer for overall business health. Durable goods inventories fell 0.8 percent in July, after declining 1.5 percent the prior month.

(Additional reporting by Alister Bull in Chattanooga; Julie Haviv and Richard Valdmanis in New York; Editing by Neil Stempleman)