U.S. retail sales rose in August at the fastest pace in 3-1/2 years and a gauge of New York State manufacturing hit a near two-year high, offering hope for a solid recovery from a severe recession.

A separate report on Tuesday showed prices received by U.S. producers rose more than expected last month, suggesting business was improving.

Federal Reserve Chairman Ben Bernanke also gave a fairly upbeat view of the U.S. economy, saying the longest and deepest recession since the 1930s was likely over.

Even though from a technical perspective the recession is very likely over at this point, it's still going to feel like a very weak economy for some time, Federal Reserve Chairman Ben Bernanke said at a Brookings Institution conference in Washington.

The Commerce Department said retail sales climbed 2.7 percent after declining 0.2 percent in July. It was the biggest monthly advance since January 2006 and well above expectations on Wall Street for a 2 percent gain.

Retail sales show the recovery is here. This wasn't just autos, it wasn't just gasoline. This was the U.S. consumer getting out of their foxhole, said T.J. Marta, market strategist at Marta on the Markets in Scotch Plains, New Jersey. This is indisputably a good number.

The strong data pushed U.S. government bonds prices lower and pulled benchmark yields from two-month lows . U.S. stocks touched fresh 2009 highs, with the Standard & Poor's 500 index <.SPX> posting its highest close since October. <.N>.

President Barack Obama, speaking at a General Motors assembly plant in Ohio, said measures undertaken by his administration to rescue the economy -- including a $787 billion stimulus package -- were working, but warned: It's going to take some time to achieve a complete recovery.

Economists are generally in agreement that the U.S. economy is in the early phase of recovery from the worst recession in seven decades. But many remain worried about lackluster consumer demand, with rising unemployment decimating incomes.

The Fed will consider the data at a meeting next week at which officials will resume debate on how best to withdraw the extraordinary support they are providing the economy. One official has already questioned whether the central bank should move ahead with everything it has already planned.


Retail sales were bolstered by the government's cash for clunkers program, which gave consumers cash to swap aging gas-guzzling cars for new, more fuel-efficient models.

Motor vehicle and parts sales surged 10.6 percent last month, the biggest rise since October 2001. Rising gasoline prices also added to the increase in overall retail sales.

The report, however, showed strength across most sectors, with the exception of furniture and building materials, evidence that household spending was likely on the mend.

Consumer spending normally accounts for about 70 percent of U.S. economic activity, with retail sales making up a third of that. Excluding motor vehicles and parts, sales jumped 1.1 percent in August after falling 0.5 percent in July.

Some analysts reckon the economy could enjoy a quick recovery from the slump that started in December 2007.

The V-shaped recovery just got a badly needed shot in the arm today as the consumer is back in the game in a big way. The outlook for the economy just brightened considerably, said Chris Rupkey, chief financial economist at the Bank of Tokyo/Mitsubishi UFJ in New York.

That optimism appeared to be shared by top U.S. consumer electronics chain Best Buy Co , which raised its earnings forecast for the full year on Tuesday and said customer traffic to its stores was stabilizing.

A report from major credit card issuer MasterCard Inc showed consumers in July and August were no longer cutting back on credit card usage as sharply as they had been earlier in the year.

While questions still hang over the degree to which debt-laden consumers can help fuel an economic recovery, the manufacturing sector appears to be gaining strength.

The New York Federal Reserve Bank's Empire State business conditions index, which gauges manufacturing activity in New York State, rose to 18.88 in September -- the highest since November 2007 -- from 12.08 in August. The survey is one of the earliest monthly guideposts to U.S. factory conditions.

A second Commerce Department report showed U.S. business inventories fell 1.0 percent in July to the lowest level since March 2006. Analysts expect businesses' need to restock will help boost the economy over the second half of the year.

Separately, the Labor Department said producer prices jumped 1.7 percent last month as gasoline prices registered their biggest surge in more than 10 years.

Economists will scrutinize a report on consumer prices on Wednesday for a clearer picture of the inflation outlook. Some analysts fear the massive efforts by the government and the Fed to aid the economy could ignite price pressures down the road.