Pending sales of previously owned U.S. homes rebounded unexpectedly in July and new claims for jobless benefits fell last week, helping dampen fears the economy could face a double dip recession.

The data on Thursday, including sturdy sales from U.S. retailers last month, followed a report on Wednesday showing a surprising gain in manufacturing activity and suggested the economy retained some underlying strength.

This is an economy that has hit a soft patch. It's not an economy that appears to be heading toward a double-dip recession, said Brian Levitt, an economist at OppenheimerFunds in New York.

Investors appeared to agree earlier fears of a double-dip recession might have been overdone as they sold long-dated U.S. government bonds and bought some stocks. The broad Standard & Poor's 500 Index <.SPX> was up 0.32 percent at midday.

The National Association of Realtors' Pending Home Sales Index, based on contracts signed, rose 5.2 percent in July from a month earlier. Analysts had expected the index, which leads actual sales by a month or two, to fall 1 percent.

Home sales have dropped sharply since a popular tax credit for home buyers ended in April and the surprise gain in pending sales raised hopes the sector could soon stabilize.

A separate report from the Labor Department showed initial claims for state unemployment benefits dropped for a second straight week last week, slipping 6,000 to 472,000.

RETAILERS POST STRONG SALES

The data helped stocks build on Wednesday's hefty gains. Sentiment was also lifted by better-than-expected August sales reported by retailers. The retail reports showed sales getting a lift as consumers sought bargains during the key back-to-school selling season.

While new jobless claims declined last week, they are still high for this stage in the economic recovery. Two weeks ago they hit a nine-month high and they remain above where they stood at the beginning of the year.

We're still uncomfortably high, given where we are at this juncture of the recovery, but that we're moving toward 400,000 rather than 500,000 is indicative of at least some measure of job creation, said Mark Luschini, chief investment strategist at Janney Montgomery Scott in Philadelphia.

The government is expected to report on Friday that nonfarm payrolls dropped 100,000 in August, the third straight month of job declines, with private sector employment increasing only 41,000, according to a Reuters survey.

The claims data offered few hints of whether those forecasts are on track, since it fell outside the survey period for the closely watched monthly jobs report.

The weak labor market threatens to derail the U.S. economy's recovery from the most painful recession since the Great Depression. Growth is losing steam as the boost from a $814 billion government stimulus package and the rebuilding of inventories by businesses fade.

FED WATCHING RECOVERY

The Federal Reserve has acknowledged the slowing recovery pace but the minutes of its last policy meeting released this week showed several policymakers felt the outlook would have to deteriorate appreciably to spur fresh monetary support.

Growing unease over the economy's health, and the high unemployment rate, are weighing on President Barack Obama's popularity and dimming the Democratic Party's prospects of keeping control of Congress in November's mid-term elections.

The economy grew at a 1.6 percent annualized rate in the second quarter, slowing markedly from a 3.7 percent pace in the January-March period.

The lackluster recovery was underscored by a second report from the Labor Department on Thursday that showed U.S. business productivity contracted at an annual rate of 1.8 percent in the second quarter, instead of the previously reported 0.9 percent. It was the largest decline since the third quarter of 2006.

While falling productivity will hurt corporate profits, some analysts said it also signaled job growth was imminent.

When productivity peaks and starts to go lower, it means that businesses have basically gotten as much out of their workers as they can and usually that is a pretty good indicator for future job creation, said OppenheimerFunds' Levitt.

The report showed unit labor costs, a gauge of potential inflation pressures, rose at a 1.1 percent rate rather than the previously estimated 0.2 percent. It was the biggest increase since the fourth quarter of 2008.

Other data on Thursday showed new orders received by U.S. factories edged up 0.1 percent last month after falling 0.6 percent in June.

(Additional reporting by Glenn Somerville in Washington and Ryan Vlastelica in New York; editing by Todd Eastham)

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