New orders for costly U.S.-made manufactured goods dropped at the sharpest rate in seven months during August, according to a government report which added to signs growth was slowing in the third quarter.

Durable goods orders overall plummeted 4.9 percent in August, Commerce Department data showed, with declines in nearly every major category.

The fall was steeper than the 3.1 percent decline Wall Street economists had forecast, but followed an upwardly revised 6.1 percent increase in July that left analysts confident the economy was not headed into a precipitous decline.

"The notion the economy is in freefall because of the housing market slowdown is not being validated by these numbers," said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey.

Analysts are watching whether problems in U.S. subprime mortgage markets that other nations in Europe and elsewhere say are affecting them will pull U.S. and global growth down. U.S. housing data this week showed the industry remained under pressure.

Bond prices initially edged higher after the durable goods report in a sign of investor caution but gave up the gains as investors moved to stocks, which were bolstered by hopes for more interest-rate cuts.

Federal Reserve Chairman Ben Bernanke told Congress last week that the U.S. central bank was aiming to "get out ahead of" the potential economic drag from deteriorating credit conditions by cutting official interest rates a half percentage point on Sept. 18.

Richard Huber, an economist with A.G. Edwards and Sons Inc in St. Louis, said that while it appeared growth was slowing, there was no evidence yet to support a view that it might deteriorate into a more serious downturn.

"All the data coming out seem to support the conclusion that the third quarter will just be a slow-growth quarter, neither recessionary nor the above-trend growth that we had in the second quarter," Huber said.

BUSINESS SPENDING WEAK

But down the road, said economist Joseph Brusuelas of IDEAglobal in New York, the manufacturing sector will suffer if business investment keeps weakening.

Nondefense capital goods orders excluding aircraft, a proxy for business spending, fell 0.7 percent in August following a 0.9 percent gain in July.

"Looking forward, we anticipate that business spending will decline precipitously in Q4 2007 and Q1 2008 due to concerns over the sustainability of demand and the fact that borrowing costs have increased," Brusuelas said.

The government's monthly durable goods report is volatile and subject to substantial revisions, but the August report was striking because the declines were so widespread. Even excluding transportation, orders fell 1.8 percent after rising 3.4 percent in July.

The drops in overall orders and in orders excluding transportation both were the steepest since January when they dropped 6.1 percent and 3.1 percent, respectively.

Excluding defense, durable goods orders fell 5.9 percent in August, more than reversing a 4.7 percent gain in July.

A separate report underlined the depth of the problem in U.S. mortgage markets as applications for new loans fell last week after climbing for three straight weeks.

The Mortgage Bankers Association said its index of mortgage application activity dropped 2.8 percent in the week ended Sept. 21, as a drop in demand for home purchase loans overshadowed a fourth consecutive rise in refinancing requests

Weaker demand for applications to buy homes is consistent with other reports finding sales and prices slumping to multiyear lows.

Existing homes sales sank in August to a five-year low, while the supply of unsold single-family houses ballooned to an 18-year high, the National Association of Realtors said on Tuesday.

(Additional reporting by Lynn Adler and Ellen Freilich in New York)

New Jersey Ben Bernanke U.S.