Housing improves but durable orders fall

WASHINGTON (Reuters) - Existing home sales posted their largest gain in two years last month, a sign the housing market may be climbing out of a slump, but orders for big-ticket factory goods fell as businesses showed wariness about the economy's health.

While U.S. businesses are exhibiting caution, other data released on Tuesday showed consumer confidence was better than expected in February, reaching a 5-1/2 year high.

"Manufacturing is going through a mini down cycle, but if not for the consumer, particularly in the service sector, we might be facing a recession," said Ken Mayland of ClearView Economics near Cleveland.

"I think the consumer is going to keep this on the soft landing side of the line," he said, expressing hope growth would cool enough to temper inflation, but not crumble.

Prices for U.S. stocks were down sharply as the weak reading on demand for manufactured durable goods added to jitters already present after Chinese stocks suffered their worst one-day sell-off in a decade.

U.S. government bond prices rose as traders saw the mixed economic news as increasing chances the Federal Reserve would lower interest rates. The dollar fell sharply against the yen and hit a two-month low versus the euro amid concerns of an economic slowdown and growing tensions with Iran.

The National Association of Realtors said home resales climbed by 3 percent in January, the biggest gain since January 2005, to reach a 6.46 million-unit annual rate. Economists had expected a slower sales pace.

Despite the pickup, the inventory of homes for sale rose 2.9 percent to 3.549 million units, representing 6.6 months' supply at the current sales pace -- the same as in December.

NAR economist David Lereah said some of the strength seen last month could likely be attributed to warm December weather, which boosted the number of sales closing last month.

He stopped short of saying the housing contraction had hit bottom, but said inventory levels were reaching a balance.

"We will slowly and sluggishly get our way out of this contraction," he said, adding that falling prices in the hard-hit West had led to a 5.6 percent rise in sales there.

Nationally, the median existing home price dropped nearly 5 percent in January to $210,600 from $221,600 in December. The price was 3.1 percent lower than in January a year ago.

CONSUMER CONFIDENCE UP

On another bright note, the New York-based Conference Board said the index of consumer sentiment edged up to 112.5 in February -- the highest level since August 2001 -- from January's slightly downwardly revised 110.2.

"It looks like the good job situation is continuing to make people feel good about the economy and supporting confidence," said Gary Thayer, chief economist at A.G. Edwards & Sons in St. Louis.

A separate report from the Commerce Department showed new orders for U.S.-made durable goods -- items meant to last three years or more -- fell a sharper-than-expected 7.8 percent last month, with nondefense goods orders registering the biggest decline ever.

While a steep drop in orders for Boeing Co. (BA.N) airliners pushed down nondefense orders, the weakness was widespread. Excluding volatile transportation orders, durable goods orders fell by 3.1 percent, the steepest drop since July 2005.

"There continues to be some concern about business spending on capital goods," said economist Joel Naroff of Naroff Economic Advisors in Holland, Pennsylvania.

Orders for nondefense capital goods, seen as a proxy for business spending, dropped by a record 19.9 percent. Excluding aircraft, nondefense capital goods order fell 6.0 percent, the largest drop since January 2004.

"With capital spending having been down in the fourth quarter, this trend is not something that makes one comfortable about the strength of the economy," Naroff said.

(Additional reporting by David Lawder in Washington and Karen Brettell in New York)