New orders for long-lasting U.S. manufactured goods rose in July, offering hope the ailing economy could dodge a second recession even though a gauge of business spending fell.

Durable goods orders jumped 4 percent, the Commerce Department said on Wednesday, as demand for autos and airplanes surged, more than erasing June's 1.3 percent drop. The rise was double economists' expectations.

This report offers some encouragement that overall manufacturing production may not have fallen entirely out of bed, said Millan Mulraine, a senior macro strategist at TD Securities in New York. The economy will likely avoid a recession, barring any outside shock.

But non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending, fell 1.5 percent after rising 0.6 percent the month before.

Economists noted this so-called core capital goods category tends to be weak in the first month of a quarter and were encouraged that shipments of these goods, which go into the calculation of gross domestic product, had risen despite the fall in new orders.

Since July, however, stock prices have dropped sharply and consumer confidence has taken a hit, suggesting the report on durable goods -- items from toasters to aircraft meant to last three years or more -- could be offering a rosier view of the economy than currently warranted.

SENTIMENT SOURS

In Germany, business confidence posted its steepest drop this month since the aftermath of the Lehman Brothers collapse in late 2008, raising fresh doubts about the broader European economy as it grapples with a crippling debt crisis.

Similar concerns hold in the United States.

There is legitimate fear that businesses will shelve expansion plans and signs of such behavior are evident in the August business surveys, said Aaron Smith, a senior economist at Moody's Analytics in West Chester, Pennsylvania.

The data helped stocks <.SPX> on Wall Street to rack up strong gains for a second day. Prices for U.S. government debt fell sharply, while the dollar <.DXY> rose modestly across the board.

Federal Reserve Chairman Ben Bernanke is expected to nod to the stock market turmoil and weak confidence in a speech at an annual central bank conference in Jackson Hole, Wyoming, on Friday.

He is unlikely to offer plans for a new round of bond purchases, but he may hint at a possible tweaking of the U.S. central bank's balance sheet to put further downward pressure on medium- and long-term interest rates.

Regional manufacturing surveys for August to date have shown a sharp drop in activity, raising the risk the nation's factory sector may have stalled this month.

The Institute for Supply Management's index of national manufacturing activity stood at 50.9 in July. Economists said it would likely fall below 50 in August, indicating contraction.

The index has been steadily declining since March, but that weakness had been blamed mainly on supply chain disruptions from Japan due to the massive earthquake there in March. The August survey will be published on September 1.

TRANSPORTATION ORDERS SOAR

Durable goods orders last month were buoyed by a 14.6 percent jump in bookings for transportation equipment, which was the largest increase since January.

That reflected a 43.4 percent surge in aircraft orders and an 11.5 percent spike in motor vehicle bookings. The increase in auto orders was the largest since January 2003 and indicated disruptions wrought by the Japan earthquake were fading.

Economists expect motor vehicle production to support growth in both the third and fourth quarters, and help the economy avoid another recession.

The automotive sector will be a positive for GDP in the third and fourth quarter, said Michael Montgomery, a U.S. economist at IHS Global Insight in Lexington, Massachusetts. We are sort of skating along the edge.

Boeing received 115 aircraft orders, 100 of those from American Airlines , according to information posted on the plane maker's website. That was up from 48 in June.

Excluding transportation, orders rose 0.7 percent after gaining 0.6 percent in June.

Manufacturing has been a key pillar of the U.S. economy's recovery and erosion of that support would be particularly bad given that housing, which has shouldered previous recoveries, continues to struggle.

Demand for loans to buy homes slumped to a nearly 15-year low last week, blamed largely on the stock market turmoil.

A separate report from the Federal Housing Finance Agency showed home prices rose 0.9 percent in June from May. However, they were down 4.3 percent from a year ago, and other reports have shown prices slipped in July.

Luxury home-builder Toll Brothers Inc on Wednesday reported tepid growth in orders in the third quarter and a rise in cancellations. It said stock market volatility and economic uncertainty continued to weigh on home buyer confidence.

(Additional reporting by Phil Wahba in New York; Editing by James Dalgleish)