U.S. builders upbeat, manufacturing shows some life

The data, however, failed to stem worries on Wall Street about weak U.S. consumer spending and the staying power of any economic recovery, as major indexes closed sharply lower.

The National Association of Home Builders and Wells Fargo said their Housing Market Index edged up one point to 18 in August -- the highest level since June 2008 and the second consecutive monthly gain.

A separate report from the New York Federal Reserve showed activity at New York state factories grew for the first time since April 2008, suggesting manufacturers could lead the economy out of its worst downturn since the Great Depression.

The jump in the Empire State manufacturing index in August back into positive territory supports other evidence that the recession ended around the middle of the year. But the strength of the recovery remains in question, said Paul Dales, U.S. economist at Capital Economics in Toronto.

Industry data showing U.S. credit card defaults stabilized in July suggested consumers are in better financial shape than feared, even though defaults and delinquencies rose at big card issuer Capital One Financial Corp.

The last Fed quarterly survey of senior loan officers showed U.S. loan demand fell in the second quarter for every major category except prime residential mortgages, while banks tightened credit standards at a less-intense pace than in the first quarter.

A string of data has now hinted the recession that began in December 2007 is near or at a close, but worries of an anemic, short-lived recovery have been hard to shake as consumers battle with high unemployment and dwindling incomes.

An announcement by Lowe's, the country's second-biggest home improvement retailer, that it was slowing expansion plans added to the angst and weighed on stocks. The Dow Jones industrial average slid 2 percent.

Sentiment was also soured by weak economic figures from Japan, giving U.S. government bonds a safe-haven boost.

DEFAULTS STABILIZING

The Federal Reserve announced the extension to mid-2010 of an emergency program aimed at boosting lending to the sickly commercial real estate market, recently cited by U.S. central bank officials as a threat to the economy's recovery if borrowers with maturing loans defaulted.

The extension of the Fed's Term Asset-Backed Securities Loan Facility, or TALF, is aimed at halting the decline of commercial property markets, widely regarded as the next shoe to drop for many already debilitated smaller- and medium-sized domestic banks.

The announcement is not that much of a surprise, said Marc Chandler, chief strategist at Brown Brothers Harriman in New York. It is clear officials remain concerned about the commercial real estate market and are not yet convinced that the securitization machine is up and running again.

The residential housing market's three-year slump shows signs of turning the corner. In the NAHB survey, the sales expectations measure for the next six months climbed four points in August to 30. The traffic of prospective buyers index rose three points to 16 in the same month.

There is definitely a sense of hope among builders that the worst of the downturn is over and that a turning point is near at hand, said NAHB Chief Economist David Crowe.

The New York Fed's Empire State survey also showed improvement in its employment measure.

The employment index provides an additional signal that manufacturing payroll losses are moderating, said Abiel Reinhart an economist at JPMorgan in New York.