U.S. housing and factory data on Thursday showed the economy still gaining strength in December but at a pace unlikely to cause the Federal Reserve to rethink its stimulus program.

Economists said they expected Friday's reading of gross domestic product to show the world's biggest economy picking up speed albeit short of the pace needed to bring down unemployment significantly.

The National Association of Realtors said its Pending Home Sales Index, based on contracts signed in December, rose 2 percent to 93.7. The increase, which was above economists' expectations for a 1.0 percent gain, pointed to another rise in sales of previously owned homes this month.

A separate report from the Commerce Department showed orders for a range of domestically manufactured goods gained 0.5 percent last month. But a nearly 100 percent drop in civilian aircraft pulled overall orders down 2.5 percent.

Economists shrugged off a surprise jump in new claims for unemployment benefit as a result of bad weather rather than a sudden setback for the labor market.

The underlying data tells me the economy is expanding but it's not expanding at any kind of pace that going to cause the Fed to sit up and say 'gee, maybe we have gone too far', said Steve Blitz, senior economist at ITG Investment Research in New York.

Fed officials on Wednesday acknowledged the improving economic outlook but said the pace of the recovery remained insufficient to bring about a significant improvement in labor market conditions.

The U.S. central bank reiterated its commitment to buy an extra $600 billion of government debt through the middle of 2011 to keep interest rates low and help the economy.

U.S. stock indexes <.SPX> held near 29-month highs as companies such as Caterpillar reported strong earnings. Prices for U.S. government debt fell slightly and the dollar was little changed against a basket of currencies <.DXY>.


The drop in overall durable goods orders was a surprise to economists who had expected orders to rise 1.5 percent, given that Boeing reported an increase in aircraft bookings from November. They expected orders to rebound in January.

Clearly these most recent orders have not yet filtered into the numbers. It's likely the January figures will reflect the end-of-the-year rise in aircraft orders, said Lindsey Piegza, an economist at FTN Financial in New York.

The government is expected to say on Friday the economy grew at a 3.5 percent annual rate in the last three months of 2010, quickening from 2.6 percent in the third quarter.

Those perceptions were bolstered by a sharp upward revision to November's orders for durable goods, excluding transportation. A proxy for business spending increased 1.4 percent in December after rising 3.1 percent the prior month.

Core capital goods shipments, which go into the calculation of gross domestic product, rose 1.7 percent after increasing 1.4 percent in November.

The outlook was clouded by a spike last week in applications for state unemployment benefits. The government blamed the increase on snow storms in the previous week in some areas that kept workers at home and delayed claims processing.

Claims in the prior week posted their biggest drop in nearly a year. Another snow storm this week could affect claims data in the coming weeks.

Initial claims jumped 51,000 to a seasonally adjusted 454,000, the highest since late October, the Labor Department said. That was the largest weekly rise since September 2005.

The increase exceeded economists' expectations for a slight gain to 405,000. A Labor Department official said four states had reported big increases in claims due to snow. In addition, he said, seasonal volatility also affected the data.

The four-week moving average of unemployment claims -- a better measure of underlying trends -- rose last week, but the increase was far less than the spike in new claims, implying a gradual labor market recovery.

(Additional reporting by Mark Felsenthal; Editing by James Dalgleish)