Nov. 25 (Bloomberg) -- Consumer spending and sales of new homes climbed more than forecast while claims for jobless benefits dropped to the lowest level in a year, putting the U.S. economy on stronger footing heading into 2010.

Household purchases increased 0.7 percent in October and new homes sold at the fastest pace since September 2008, data from the Commerce Department showed today in Washington. The number of Americans applying for unemployment insurance dropped by 35,000 last week, the Labor Department said.

Government housing incentives, which have been extended and expanded into next year, and Federal Reserve efforts to keep borrowing costs low are making it possible for Americans to keep spending even as unemployment climbs. The decrease in firings points to an improvement in labor-market conditions that will help sustain the recovery next year.

“The things we watch closely to determine trends in consumer behavior were impressively strong,” said David Resler, chief economist at Nomura Securities International Inc. in New York. “The layoff picture, at least, has improved and is continuing to improve. What we still have to see is hiring, and we haven’t seen much evidence of that yet.”

Stocks in the U.S. gained, with the Standard & Poor’s 500 Index adding 0.5 percent to close at 1,110.63. The Dow Jones Industrial Average rose 0.3 percent to 10,464.4, while the yield on the benchmark 10-year Treasury note dropped to 3.27 percent at 4:39 p.m. in New York from 3.31 percent late yesterday.

Fewer Orders

A separate report from the Commerce Department showed the economic recovery will be uneven and slow to gain speed. Orders for durable goods unexpectedly declined 0.6 percent in October. Slowing demand for machinery, computers and communications equipment indicates companies are still wary about being stuck with unsold goods.

The increase in consumer spending last month exceeded the median estimate of economists surveyed that projected a 0.5 percent gain. Incomes climbed 0.2 percent, also more than forecast. Disposable income, or the money left over after taxes, rose 0.4 percent, the most since May.

The figures underscore why some retailers such as J.Crew Group Inc. are seeing improving demand heading into the holiday shopping season. The U.S. clothing retailer yesterday reported that third-quarter profit more than doubled.

Home Sales

Sales of new homes rebounded more than anticipated in October as buyers rushed to take advantage of a government tax credit before it expired. President Barack Obama this month extended the $8,000 tax credit for first-time homebuyers until April 30, from Nov. 30, and expanded it to include some current homeowners.

Borrowing costs may stay low as Fed policy makers have signaled they will hold their benchmark interest rate near zero for an extended period. The average rate on a 30-year fixed mortgage dropped for a fourth straight week, according to Freddie Mac of McLean, Virginia. The rate fell to 4.78 percent, matching the record low set in April.

A rise in new-home sales in the South accounted for the entire U.S. increase, the Commerce Department’s report showed.

“The South is the largest region by size, accounting for over 50 percent of new home sales, so that the gain is still significant, even though a broader improvement would have been more favorable,” Ryan Wang, an economist at HSBC Securities USA Inc. in New York, said in a note to clients.

The median price of a new home in the U.S. decreased to $212,200, from $213,200 a year earlier.

Sales of new homes were up 5.1 percent from October 2008, the first year-over-year gain since November 2005.

Unsold Homes

Inventories dropped. The number of homes for sale fell to a seasonally adjusted 239,000, the fewest since May 1971. The supply of homes at the current sales rate decreased to 6.7 months’ worth, the lowest level since December 2006.

Initial jobless claims declined to 466,000 in the week ended Nov. 21 from 501,000 a week earlier, signaling the labor market was deteriorating at a slower pace. The number of people collecting unemployment insurance dropped in the prior week, while those getting extended payments also declined.

After eliminating more than 7 million jobs in the past two years, companies may have been limited in their efforts to cut further as the economy recovers. The government may report next week that employers in November shed the fewest jobs since January 2008.

Employment Forecast

The economy probably lost 116,000 jobs in November, economists surveyed by Bloomberg forecast the Labor Department will report on Dec. 4. The jobless rate probably held at a 26- year high of 10.2 percent for a second month, economists forecast.

A Labor Department spokesman said there were no special factors to explain the drop in claims last week. Economists say the number of applications is often volatile in the last couple months of the year, in part because of holidays.

A separate report showed confidence among U.S. consumers fell in November. The Reuters/University of Michigan’s final index of consumer sentiment decreased to 67.4 from 70.6 in October.

The University of Michigan’s measure of current conditions, which reflects Americans’ perceptions of their own finances and whether it’s a good time to buy big-ticket items such as cars and homes, fell to 68.8 from 73.7 in October.

The index of expectations six months from now, which more closely projects the direction of consumer spending, decreased to 66.5 from 68.6 in October.

To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net; Bob Willis in Washington at bwillis@bloomberg.net

Last Updated: November 25, 2009 16:42 EST