U.S. wholesalers started restocking in October for the first time in more than a year, suggesting the economy could get a lift as a long-running effort by businesses to pare inventories reaches an end.

The Commerce Department said on Wednesday that total wholesale inventories rose 0.3 percent, snapping a 13-month declining trend. They had fallen 0.8 percent in September.

Economists had expected stocks of unsold goods to drop 0.5 percent and the surprise building of inventories prompted some to raise forecasts for fourth quarter U.S. economic growth.

We had been assuming further declines in wholesale inventories, in particular in the nonautomotive portion, said Ben Herzon, a senior economist at Macroeconomic Advisers in St Louis, Missouri.

The forecasting firm raised its projection for fourth quarter growth in U.S. gross domestic product from 3.2 to 3.4 percent.

For graphic linking inventories to GDP, see: http://link.reuters.com/nyc95g

The data helped investors on Wall Street to overlook a weak forecast for the technology sector, as well as concerns over the credit ratings of Greece and Spain. U.S. stocks ended higher, with the blue chip Dow Jones industrial average <.DJI> gaining 51.08 points or 0.50 percent to 10,337.05. <.N>

Marc Pado, a market strategist at Cantor Fitzgerald and Co in San Francisco, said the buildup of wholesale inventories underscored optimism about the economy's recovery.

It shows a growing conviction on the part of manufacturers that they are going to move these goods, said Pado.

RECOVERY OPTIMISM

A moderation in the rate at which businesses are drawing down inventories contributed to economic growth in the July-September period, the first expansion after four straight quarters of decline.

Analysts reckon slower inventory liquidation and restocking will support the economy's recovery in coming quarters.

Offering further signs that the recovery was gaining momentum, a separate report form the Mortgage Bankers Association showed demand for U.S. home loans rose last week to the highest in about two months.

Total mortgage applications rose 8.5 percent, while demand for loans to buy a home increased by 4.0 percent. The housing market, the main catalyst of the worst U.S. recession in 70 years, is stabilizing after a three-year slump.

With the liquidation of inventories appearing to be in its final stages, the economy would remain supported through next year, analysts said.

We could be tracking close to a $45 billion drawdown on fourth quarter inventories, which would represent a huge swing from the $133 billion annual pace of inventory de-stocking in the third quarter, said Michael Feroli, an economist at JP Morgan in New York.

That would imply an inventory contribution to fourth quarter GDP of around 3 percentage points. While this would be a positive for fourth-quarter GDP, it could take a little steam out of first half 2010.

SALES PICK UP, STOCKS LOOKING LEANER

Inventories of durable goods -- items meant to last -- fell 0.4 percent at the wholesale level, but auto stocks rose 1.7 percent, the largest such gain since December 2008, the Commerce Department said.

Nondurable inventories were 1.5 percent higher, the largest rise since June 2008, as wholesalers added to stocks of drugs, alcohol, farm products and petroleum products.

Sales at wholesalers rose by a more-than-expected 1.2 percent in October, the seventh straight monthly increase, after rising 1.3 percent the previous month.

The rise in sales lowered the inventory-to-sales ratio, a measure of how long it would take to sell stocks at the current sales pace, to 1.16 months' worth from September's 1.17.

It was the seventh straight monthly decline and brought the ratio to its lowest since August last year, a sign that inventories that had piled up as the economy plunged around the turn of the year had largely been worked off.

(Additional reporting by Ellis Mnyandu and Lynn Adler in New York)

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