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U.S. economy shows signs of shrugging off higher interest rates

A student organizes his papers before meeting with potential employers at the 2012 Big Apple Job and Internship Fair at the Javits Center in
A student organizes his papers before meeting with potential employers at the 2012 Big Apple Job and Internship Fair at the Javits Center in

By Jason Lange

WASHINGTON (Reuters) - U.S. home resales surged in August to a 6-1/2-year high and factories grew busier in the Mid-Atlantic region this month, signs that rising borrowing costs are weighing only modestly on the economy.

The data released on Thursday could make the Federal Reserve more willing to reduce a bond-buying stimulus program. The Fed had flagged concerns over a sharp increase in interest rates when it shocked investors on Wednesday by keeping the program at full throttle.

Last month, sales of existing homes grew 1.7 percent, the National Association of Realtors said. That took sales to an annual rate of 5.48 million units, the highest level since early 2007 when a housing bubble was deflating and the economy was sliding toward its deepest recession in decades.

The report confounded analysts who had expected higher interest rates would lead to a decline in resales. Mortgage rates have risen more than a percentage point since Fed Chairman Ben Bernanke hinted in May that the central bank could begin reducing monthly bond purchases soon.

"Overall, these reports point to a sustained pick-up in economic growth momentum," said Millan Mulraine, an economist at TD Securities in New York.

The manufacturing sector also is showing signs of brisk growth. Factory activity in the U.S. mid-Atlantic region increased by the most in more than two years in September and firms' optimism about the future hit a 10-year high, according to a survey conducted by the Philadelphia Federal Reserve Bank.

In yet another indication the economy is shrugging off higher borrowing costs, an index of U.S. leading indicators advanced by a greater-than-expected 0.7 percent in August.

"The economy is grinding its way higher," said Mark Lehmann, president of JMP Securities in San Francisco.

OKAY ... FOR NOW

Many economists, however, feel it is just a matter of time before the spike in mortgage rates hits the housing market harder.

"The strong levels of existing home sales in July and August are likely a result of homebuyers locking in mortgage rates due to uncertainty about the future trajectory of rates," economists at Nomura said in a note to clients.

Already, new home construction has looked wobbly. Citing lower demand for mortgage refinancing due to higher interest rates, Wells Fargo said on Thursday it was laying off 1,800 workers in its home loan business.

A separate report from the Labor Department showed the number of initial claims for state unemployment benefits last week held near its lowest levels since before the last recession began in December 2007.

Claims data, however, have been thrown into disarray since an update to government computer systems in California, the nation's most populous state, and Nevada created a backlog in the processing of new claims two weeks ago.

A Labor Department analyst said the two states still appeared to be working through the backlog, making it hard to get a clear read on the health of the labor market.

The day's data appeared to have little impact on Wall Street sentiment. U.S. stock prices were down slightly, while yields on government bonds edged up.

A separate report highlighted how much an increase in American exports is helping the global economy achieve a more healthy balance of trade and money flows.

Higher U.S. exports narrowed the country's current account deficit in the second quarter to its lowest in four years, the Commerce Department said.

The current account deficit, a broad measure of the flow of goods, services and money across national borders, dropped to $98.9 billion in the April-June period from a revised $104.9 billion in the prior period.

The second-quarter level was the lowest since 2009. The gap was equivalent to 2.4 percent of national economic output, the smallest ratio since 1998.

(Reporting by Jason Lange; Additional reporting by Margaret Chadbourne and Alister Bull in Washington and; by Steven C. Johnson and Rodrigo Campos in New York; Editing by Andrea Ricci)

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