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Factory and housing data supports growth picture

By Lucia Mutikani

WASHINGTON (Reuters) - Orders for long-lasting U.S.-made goods surged last month and home prices posted their biggest year-on-year gain in six and a half years in January, the latest signs the U.S. economy regained momentum early in the first quarter.

The upbeat picture was dimmed somewhat by other data on Tuesday showing a sharp drop in consumer confidence as Americans worried about the impact of tighter fiscal policy, particularly$85 billion in government budget cuts known as the "sequester."

"The economy continues to expand in the first quarter, but we do have a drag from the sequester," Gus Faucher, senior economist at PNC Financial Services Group in Pittsburgh, said.

Durable goods orders jumped 5.7 percent in February as demand for transportation equipment rebounded, the Commerce Department said. The rise in orders reversed January's 3.8 percent plunge and handily beat economists' expectations.

While orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, posted their largest decline since July, the drop in demand in this so-called core capital followed a big jump in January, and economists were largely unfazed.

"To the extent that the weakness in core capital goods orders was a partial retracement of the unsustainable big gains the month before, the constructive tone in business investment over the past few months remains largely intact," Millan Mulraine, a senior economist at TD Securities in New York, said.

Shipments of core capital goods actually increased 1.9 percent, leading some economists to bump up their forecasts for first-quarter economic growth.

JPMorgan raised its estimate by 0.4 percentage point to a 2.7 percent annual rate, while Goldman Sachs upped its forecast by a tenth of point to 3 percent. The economy expanded at an annual pace of only 0.1 percent in the fourth quarter.

HOUSING PROVIDES A LIFT

A strengthening housing market is also giving the economy a lift. Standard & Poor's said its S&P/Case Shiller composite index of 20 metropolitan areas rose 8.1 percent in January from a year ago, its biggest rise since June 2006.

It was the first time since March 2006 that all 20 metropolitan areas tracked by the index showed year-over-year price increases. On a month-on-month basis the index rose 1 percent on a seasonally adjusted basis.

"The housing market recovery is going to be a positive contributor to growth going forward, which is important," said Chris Costanzo, an investment officer at Tanglewood Wealth Management in Houston.

Stocks on Wall Street ended higher, pushing the Standard & Poor's 500 index within spitting distance of its all-time high. The dollar hovered near four-month highs against the euro, as troubles in Cyprus also weighed on the single currency.

The dollar also rose against the yen. U.S. Treasury debt prices eked out modest gains.

Another report from the Commerce Department showed a drop in new homes sales last month after hefty gains in January, but sales were up 12.3 percent from February of last year.

The report underscored the firming in home prices. The median sales price for a new home increased 3 percent from January to $246,800 and was up 2.9 percent from a year ago.

Rising prices are creating a wealth effect that is helping to cushion consumer spending against a recent hike in taxes.

"As such, consumer spending remains in a growth mode, despite the recent headwinds of higher taxes and diminished discretionary income," said Jim Baird, chief investment officer at Plante Moran Financial Advisors in Kalamazoo, Michigan.

With the fundamental health of the U.S. economy improving, economists said they did not believe the drop in the Conference Board's index of consumer attitudes, which slid to a reading of 59.7 from 68 in February, to prove lasting.

"We expect consumer confidence to gain ground as the shock value of the sequester disappears," said Chris Christopher an economist at IHS Global Insight in Lexington, Massachusetts.

Last month, overall orders for durable goods were buoyed by a 21.7 percent jump for transportation equipment as demand for civilian aircraft surged 95.3 percent.

(Additional reporting by Leah Schnurr in New York; editing by Neil Stempleman, Tim Ahmann and Leslie Adler)

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