Pending sales of previously owned homes hit a five-month high in March as buyers rushed to sign contracts before a tax credit expired, while a jump in factory orders underscored manufacturing strength.

Analysts said the data on Tuesday suggested the economic recovery was gaining more muscle and was setting the tone for a strong second-quarter growth pace. The economy expanded at a 3.2 percent annual rate in the January-March period.

The second quarter is going to be stronger than the first quarter in terms of growth. The data continues to point to a sort of chewing up some of that output gap that widened out when the recession hit, said John Canally, an economist at LPL Financial in Boston.

The National Association of Realtors said its Pending Home Sales Index, based on contracts signed in March, rose 5.3 percent to 102.9, building on the prior month's 8.3 percent rise. Markets had expected pending sales, which lead existing home sales by one to two months, to rise 4 percent in March.

Separately, new orders for manufactured goods received by U.S. factories unexpectedly rose 1.3 percent in March, after an upwardly revised 1.3 percent gain in February initially reported as a 0.6 percent rise, the Commerce Department said.

Economists had looked for a decline of 0.1 percent. The upbeat reports had little impact on U.S. financial markets and were overshadowed by persistent doubts over Greece's ability to tackle its debt problems.

Wall Street stocks suffered their biggest one-day loss in three months, with all major indices dropping more than 2 percent.

Treasury debt prices rallied and benchmark yields, which move in the opposite direction, hit two-month lows, while the U.S. dollar rose to a one-year high against the euro.

MANUFACTURING EXPANDING

The surprise surge in factory orders confirmed the manufacturing sector continued to led the economy's recovery from the worst downturn since the 1930s. Data on Monday showed manufacturing activity, as measured by the Institute for Supply Management, grew at its fastest pace in nearly six years in April.

The strong bounce back in production follows a prolonged period of drawdown in business inventories to exceptionally lean levels.

Excluding transportation orders, factory orders surged 3.1 percent in March, the biggest gain in almost five years, the Commerce Department data showed.

Non-defense capital goods orders excluding aircraft, viewed as an indicator of business confidence, jumped 4.5 percent, the largest increase since December 2007.

While the rise in March pending home sales was a reflection of the boost from the homebuyer tax credit, it bode well for the spring sales season, analysts said.

They said the increase in pending home sales suggested sales of existing homes likely rose to an annual rate of between 5.6 million units and 5.8 million units last month. Sales of previously owned homes rose to rate of 5.35 million units in March.

People do feel slightly better than they have in the past. You will see the numbers hang in there while there is still value to be had, but summer will be quite slow, said Paul Anastos, president of Mortgage Master in Walpole, Massachusetts.

Prospective buyers had to sign contracts by the end of April and close by the end of June to be eligible for the tax break. Until recently, buyers had been slow to respond to the tax credit, which was extended and expanded last year, causing the housing recovery to stall.

Though home sales started improving in March, they are not expected to match the gains registered with the initial tax credit. Still, analysts do not see the housing market slipping back into the slump that helped to trigger the recession.

We expect a pullback after the tax credit expires. Ultimately, the demand for housing is determined by the underlying economic fundamentals and they are gradually improving, said Mark Vitner, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.

Employment, which is key to sustaining the economic recovery, is gradually rising.

According to a Reuters survey, nonfarm payrolls likely increased by 200,000 in April, adding to the prior month's 162,000 gain. The unemployment rate, however, is expected to remain unchanged at 9.7 percent for a fourth month.

The employment report is due for on Friday.

(Additional reporting by Mark Felsenthal; Editing by Dan Grebler)

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