Sales of new U.S. homes hit their highest level in 10 months in July and orders for long-lasting manufactured goods surged, offering 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 an annual pace of 433,000 units, the highest rate since September.

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

A report showing mortgage applications rising for a second straight week, with demand for refinancing loans reading their highest level since early June, suggested home sales are still rising.

The recovery in the housing market is very much under way, said Michelle Meyer, an economist at Barclays Capital in New York.

In a third report, the Commerce Department said a surge in demand for aircraft pushed orders for U.S.-made durable goods up 4.9 percent last month, 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 data was the latest hinting that the U.S. economy's worst slump in 70 years was over or close to it, though analysts cautioned that recovery will be hobbled by sluggish consumer demand, owing to high unemployment.

Highlighting the tight squeeze on households, a survey showed Americans will cut their travel plans for the summer-ending Labor Day holiday dramatically this year to save money.

Despite the encouraging economic data, U.S. stocks ended flat, pausing after strong gains earlier this week. U.S. government bond prices rose modestly.

UPBEAT PICTURE

Atlanta Federal Reserve Bank Dennis Lockhart said the economy was in the early stages of recovery, but cautioned that it would be a while before unemployment started to fall.

While the housing sector appears to be recovering from a three-year slump, there are fears it could falter if a government tax credit of up to $8,000 for first-time home buyers is not extended. The credit is due to expire at the end of November.

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 new homes available for sale fell 3.2 percent to 271,000 units in July, the lowest since March 1993. At July's sales pace, that would be a 7.5-month supply, the lowest since April 2007.

AIRCRAFT BOOSTS ORDERS

Economists said the home sales data was clearly good news, but they noted the report on orders for durable goods, items meant to last at least three years, was mixed.

Demand for transportation equipment jumped 18.4 percent, the biggest gain in three years, as civilian aircraft orders at Boeing jumped and the government's cash-for-clunkers program, which gave buyers discounts to trade-in old gas guzzlers for new fuel-efficient cars, lifted auto demand.

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 of durable goods increased 2 percent.

But 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 previous month.

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