New construction of U.S. homes and permits for future building scaled a nine-month high in August, and the number of people filing new claims for jobless benefits fell last week, suggesting a recovery was underway.

But a drop in groundbreaking activity in single-family homes and a rise in the number of Americans drawing long-term unemployment compensation tempered optimism that the economy would see a sharp rebound from its worst slump in 70 years.

The Commerce Department said on Thursday housing starts rose 1.5 percent from July to an annual rate of 598,000 units, a touch below market forecasts for 600,000 units.

In another report, the Labor Department said the number of workers filing new claims for jobless benefits fell by 12,000 last week to 545,000, the lowest level since early July, defying market expectations for a rise to 555,000.

Factory activity in the country's Mid-Atlantic region rose in September to the highest level since June 2007, the Philadelphia Federal Reserve Bank said. However, employment and new orders measures slipped.

We are at that stage where an economy exits recession. The the recovery is going to be moving along due to policy initiatives and inventory restocking, said Joseph Brusuelas, an economist at Moody's Economy.com in West Chester, Pennsylvania. It's a U-shaped recovery, with some parts a little bumpy.

Data ranging from retail sales to industrial production have pointed to solid third-quarter economic growth, but questions over the sustainability of the recovery continue to linger amid stubbornly high unemployment.

In a further boost to the economy, a Federal Reserve report showed U.S. households' net worth rose by $2 trillion to $53.1 trillion in the second quarter, the first increase since before the recession began in 2007.

Investors on Wall Street largely ignored the data after driving U.S. stocks to successive 2009 highs in the past three days. Stocks ended flat to marginally lower <.N>.

U.S. Treasury debt prices rallied as investors latched on to the weak single-family homes groundbreaking activity .

Single-family home construction fell 3 percent last month to a 479,000 unit rate -- after five straight monthly increases. Such homes are the largest segment of the housing market and were hardest hit by housing downturn.

Starts for the volatile multifamily segment jumped 25.3 percent to a 119,000 unit rate, reversing the previous month's slump. Housing starts are down 29.6 percent over the past 12 months, the Commerce Department said.

HOUSING TO CONTRIBUTE TO GROWTH

The housing market, the main trigger of the recession that started in December 2007, is showing steady signs of healing. Despite the setback for single-family homes in August, analysts expect home-building activity to contribute to economic growth this quarter.

We expect that real residential investment grew about 30 percent annualized in the third quarter, a robust increase that would be the first quarterly rise since 2005, said Abiel Reinhart, an economist at JP Morgan in New York. Residential investment should continue to increase over the coming year.

Activity has been supported by the government's $8,000 tax credit for first-time buyers and Federal Reserve purchases of government and mortgage related debt that have depressed home loan rates.

Treasury Secretary Timothy Geithner said on Thursday the Obama administration had not yet decided whether to extend the program when it expires at the end of November, but looking was closely looking at the issue.

About 1.4 million taxpayers have so far taken advantage of the tax credit, according to U.S. tax authorities.

The Fed's policymaking committee meets next week and debate is likely to center on a strategy to withdraw the extraordinary support the central bank is providing the economy. It is seen leaving its benchmark overnight lending rate near zero.

A survey on Wednesday showed confidence among home builders reached its highest level in 16 months in September, which bodes well for future home construction.

New building permits, which give a sense of future home construction, climbed 2.7 percent to 579,000 units in August. That compared to analysts' forecasts for 580,000 units.

Compared to the same period a year-ago, building permits were down 32.4 percent.

The Labor Department report showed the number of people still on jobless aid after an initial week of benefits increased by 129,000 to 6.23 million in the week ending Sept 5, the latest for which data is available.

It was the largest one week gain since late June and a reminder that the labor market remained fragile, though companies have significantly cut back on layoffs.

That might be because companies are profoundly skeptical about the sustainability of the upturn, said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York.

But, unless they believe the economy is about to suffer a serious broad relapse, we think they will have to reduce the rate of job losses.

(Additional reporting by Alister Bull)

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