New orders for long-lasting U.S.-made goods rose in February for the first time in seven months and new home sales rebounded, government data showed on Wednesday, suggesting the economic downturn might be easing a bit.

The Commerce Department said durable goods orders rose 3.4 percent to $165.6 billion in February, the biggest gain since December 2007, after a 7.3 percent drop the prior month. Sales of newly built U.S. single-family homes rose at their fastest pace in 10 months in February, it said in another report.

The sky is no longer falling, we seem to have hit rock bottom. The data suggest that the weakest month of the recession possibly was January and now things will probably stabilize at this lower level, said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York.

U.S. stocks rallied on the data, with the Dow Jones industrial average ending 89.84 points higher at 7,749.81 and the S&P 500 closing up 7.76 at 813.88.

The upbeat economic reports and tepid demand in a record-large auction of five-year U.S. Treasury notes sent benchmark government bond yields, which move inversely to prices, rising to their highest in a week.

Recent data, including retail sales and housing, have pointed to some signs of a moderation in the pace of the 15 month housing-led recession.

New durable goods orders excluding transportation rose 3.9 percent in February, the largest gain since August 2005, the Commerce Department said. Orders for machinery soared 13.5 percent in February, the biggest increase since March 2004.

One of the few weak spots in the report was civilian aircraft and parts, which dropped 28.9 percent after Boeing reported only four new aircraft orders in the month after 18 orders in January. Motor vehicle and parts eased 0.6 percent after a 7.6 percent tumble in January.

Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending, expanded 6.6 percent in February. The prior month was revised to an 11.3 percent drop, previously reported as a 5.7 percent decline.

Despite the upbeat data, analysts said first-quarter gross domestic product would still contract at more or less the same pace as in the October-December quarter.

Output fell at a 6.2 percent annualized rate in the fourth quarter, but this figure is likely to be revised down to show a contraction of 6.5 percent when the government releases its final estimates on Thursday, according to analysts' estimates.

INVENTORIES A DRAG

While consumption expenditures have apparently stabilized, investment and exports continue to plummet, said Harm Bandholz, an economist at Unicredit Markets and Investment Banking in New York. Private inventories will be a significant drag on GDP growth as well.

Inventories of manufactured durable goods fell for a second consecutive month in February, easing 0.9 percent to $336.8 billion, after dropping 1.1 percent in January, the Commerce Department said.

Manufactured durable goods shipments, which contribute to the GDP number, fell for the seventh consecutive month in February, slipping 0.5 percent to $179.1 billion.

In a separate report the Commerce Department said sales of newly built U.S. homes rose 4.7 percent to a 337,000 annual pace, the fastest increase since last April, from 322,000 in January.

Despite the increase, February sales were the second lowest ever after the drop in January to the slowest pace in records going back to 1963, the department said. Economists, who had forecast another decline in sales, were still encouraged.

This completes a trifecta of positive housing reports for February. A sustained increase in housing demand would be the best tonic for the credit crisis and a major sign that the worst of the recession is behind us, said Sal Guatieri, an economist at BMO Capital Markets in Toronto.

Sales of previously owned homes rose 5.1 percent in February, while housing starts soared 22.2 percent that month.

Stabilizing the housing market, the main trigger of the current economic slump, is crucial for the economy's recovery.

The median sales price in February fell a record 18.1 percent to $200,900 from a year earlier, the department said.

The inventory of homes available for sale in February was at 330,000, the smallest since June 2002. The February sales pace left the supply of homes available for sale at 12.2 month's worth.

New and existing home sales have hit their lows for this cycle. We expect housing inventory-to-sales ratios to fall from still-high levels as 2009 unfolds, said Michael Darda, chief Economist, MKM Partners in Greenwich, Connecticut.

Home prices should begin to flatten out after inventories fall to 7-8 months, which we expect before the year is up.

In other good news for the housing market and the economy, applications for home loans jumped last week as interest rates hit record lows after the Federal Reserve announced it would buy longer-term U.S. government debt.

(Additional reporting by Julie Haviv in New York)

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