U.S. consumer spending and home sales rose more than expected in October, while new claims for jobless benefits fell sharply last week, suggesting the economic recovery was gaining traction.

A surprise decline in orders for long-lasting U.S.-made goods and a second straight monthly drop in consumer confidence, however, offered a reminder that the recovery from the most brutal recession in 70 years would be gradual.

Overall, the data suggest we have relatively strong growth momentum, at least for now. The big question is about next year, when the effects of government stimulus fade. What is the economy going to look like? said Zach Pandl, an economist at Nomura Securities International in New York.

The economy resumed growth in the third quarter, helped by government programs such as a popular $8,000 tax credit for first-time home buyers, which continues to prop up sales.

The Commerce Department on Wednesday said consumer spending, which normally accounts for over two-thirds of U.S. economic activity, increased 0.7 percent last month after falling 0.6 percent in September. Economists had expected a gain of 0.5 percent.

Separately, the Labor Department reported that initial claims for state unemployment benefits slid to 466,000 last week, the lowest in more than a year, from 501,000 the prior week. It was the fourth straight weekly decline and the first time since January that claims dipped below 500,000.

Another Commerce Department report showed sales of newly built U.S. single-family homes surged 6.2 percent to a one-year high last month. Sales hit a 430,000 unit annual pace, up from 405,000 in September and beating expectations for a 410,000 unit pace.

The data lifted U.S. stocks, with both the blue chip Dow Jones industrial average and the Standard & Poor's 500 Index ending at 13-month closing highs. Prices for U.S. government bonds rose as an auction of seven-year notes attracted strong demand, outweighing the positive economic data that had earlier driven Treasury debt prices lower.

NEW HOMES INVENTORY PLUMMETS

The rise in housing sales pushed the supply of new homes on the market down to 239,000 units, the lowest level since May 1971.

Home sales have been driven higher by buyers rushing to take advantage of the tax credit for first-time homeowners, which had been scheduled to expire on November 30 but has since been extended into next year.

Falling house prices and low mortgage rate are also contributing to the recovery in the housing market, whose collapse was the main trigger of the U.S. recession.

Some analysts noted that a large chunk of sales in October was for new homes on which building had not yet started, making it unlikely the tax credit had boosted sales.

There is no way you could have put in an order for a brand new constructed home in October and expect that it would be finished in November to have closed on the contract, said Omair Sharif, an economist at RBS in Greenwich, Connecticut.

It's much more likely that the sales gain was reflective of low prices, low mortgage rates and other fundamentals.

U.S. 30-year mortgage rates dropped in the past week to match a record low set in April, while the 15-year home loan rate fell to a new all-time low, Freddie Mac reported on Wednesday.

Data earlier this week showed sales of previously owned homes jumped to their highest level in more than 2-1/2 years last month, and the decline in prices moderated.

Economists are hoping signs of stability in the housing market will help to improve the psychology of households, shattered by the highest unemployment in 26-1/2 years, but confidence remained shaky this month.

The Reuters/University of Michigan Surveys of Consumers' final index of consumer sentiment in November came in at 67.4, down from October's 70.6 but up from an initial 66.0

And a 0.6 percent drop last month in orders for durable goods, which include products such as refrigerators and computers meant to last at least three years, raised fears that the manufacturing sector's recovery was faltering.

Orders increased 2 percent in September.

While we are convinced that the industrial recession has ended, the chance of a vigorous recovery is remote. The industrial recovery will likely be relatively slow and punctuated by fits of growth and decline, said Daniel Meckstroth, chief economist for the Manufacturers Alliance/MAPI.

Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending, fell 2.9 percent last month after rising by a hefty 2.6 percent in September.

(Additional reporting by Mark Felsenthal in Washington and Richard Leong in New York; Editing by Leslie Adler)

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