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

An unexpected decline in orders for long-lasting U.S. manufactured goods, however, tempered some of the optimism and was a reminder that recovery from the most brutal recession in 70 years would be gradual.

The Commerce Department on Wednesday reported that 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. That was above market expectations for a gain of 0.5 percent.

Certainly everybody is looking for the consumer to begin step up here a little bit in the economy, so this is positive data, said Tim Ghriskey, chief investment officer at Solaris Asset Management in Bedford Hills in New York.

The Labor Department said initial claims for state unemployment benefits slid to 466,000 last week from 501,000 the prior week in the fourth straight week of declines. The figure was well below market expectations for 500,000.

And sales of newly built U.S. single-family homes jumped 6.2 percent in October to a one-year high, the government reported.

U.S. stocks rose on the jobless claims and housing data, which was viewed as a sign that the battered labor market was gradually healing. Prices of U.S. government bond, a traditional safe-haven investment, extended losses.

The Commerce Department reported sales of newly built U.S. single-family homes rose to a 430,000 unit annual pace last month, from 405,000 units in September.

That beat market expectations for a 410,000 unit pace. The rise in sales pushed the supply of new homes on the market last month down to 239,000 units, the lowest level since May 1971.

For a graphic on housing sales, click on link.reuters.com/jyj63g.

Analysts said the housing data was a good sign for the economy, but cautioned that gains reflected buyers' rush to take advantage of the government's $8,000 tax credit for first-time buyers that had been scheduled to expire on November 30. That credit has since been extended into next year.

HOUSING STABILIZING

The housing market, the main trigger of the U.S. recession, is recovering from a three-year slump.

We think housing, that is sales of new and existing homes, housing prices and housing starts, has now finally entered a bottoming process due in large part to the 80 percent drop in housing starts over the past three years, said John Canally, an economist at LPL Financial in Boston.

It seems, however, that the potential end of the credit may have pushed people into the market who were on the sidelines, he added.

Analysts are hoping signs of stabilization in the housing market will help to improve the psychology of households, shattered by the highest unemployment in 26-1/2 years.

A separate survey showed consumer sentiment was on the mend. The Reuters/University of Michigan Surveys of Consumers' final index of consumer sentiment in November stepped up to 67.4 from 66.0 in the first half of the month.

There are fears that consumer spending may slow in the fourth quarter because of high unemployment and hold back economic growth.

The jobless claims are still above the 400,000 level that analysts say would signal growth in payrolls.

For a graphic on jobless claims, click on link.reuters.com/pyg63g

The Commerce report also showed personal income increased 0.2 percent in October after a similar advance the previous month. That was above market expectations for a 0.1 percent gain.

Savings fell to an annual rate of $490.3 billion, pushing down the saving rate to 4.4 percent from 4.6 percent in September.

In another report, the Commerce Department said orders for durable goods, which include products such as refrigerators and computers, dropped 0.6 percent after rising 2.0 percent in September. Analysts polled by Reuters had forecast orders rising 0.5 percent in October.

Durable goods orders are a leading indicator of manufacturing activity.

It does appear that momentum in manufacturing is weakening as we move into the end of the year. The manufacturing sector bears close watching since it is considered a forward indicator for the economy, said Kenneth Kim, economist at Stone & McCarthy Research Associates in Princeton, New Jersey.

But Cameron Findlay, chief economist for Lendingtree.com in Charlotte, North Carolina, said he was optimistic on the economy because the rise in sales of new homes is a precursor to support for labor, materials and construction industries, as well, thereby contributing toward improvements in GDP.

New durable goods orders excluding transportation declined 1.3 percent last month after rising 1.8 percent in September.

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.

(Reporting by Lucia Mutikani and Mark Felsenthal; Editing by Leslie Adler)

Unemployment