Feb. 27 (Bloomberg) -- A downturn in manufacturing is restraining U.S. economic growth even as consumer confidence increases and housing shows further signs of stabilizing, reports today showed.

Durable-goods orders fell 7.8 percent in January, reflecting the biggest slide in business equipment demand in three years, the Commerce Department said in Washington. At the same time, the Conference Board's consumer-optimism index unexpectedly increased to the highest level in more than five years, and the National Association of Realtors said existing- home sales rose more than forecast.

``Growth will probably continue to be sluggish, but the stage seems set for a gradual acceleration toward the end of the year,'' said Nariman Behravesh, chief economist at Global Insight Inc. in Lexington, Massachusetts. ``Consumers are still fairly upbeat, housing has probably bottomed out, and all we need is for corporate America to stop being so risk-averse.''

The plunge in durable-goods orders led some economists to cut their forecasts for economic growth this quarter. At the same time, few predicted an end to the expansion as long as consumers -- whose spending accounts for two thirds of gross domestic product -- continue to be what Federal Reserve Chairman Ben S. Bernanke termed the ``mainstay'' of the economy.

The Conference Board's index increased to 112.5 from 110.2 the prior month, the New York-based group said. The proportion of people who said jobs are hard to get dropped to the lowest since August 2001. The median forecast among economists surveyed by Bloomberg News was for a decline to 108.5.

Home Sales

Purchases of previously-owned homes increased 3 percent last month to an annual rate of 6.46 million, from a 6.27 million December rate that was higher than initially reported. January purchases were forecast at a 6.24 million pace. Sales fell 4.3 percent compared with a year earlier.

Falling prices may be contributing to the pickup in demand. Values dropped 0.7 percent in the fourth quarter after falling 0.4 percent the previous three months, according to the S&P/Case-Shiller home-price index issued today. Prices nationwide were up 0.4 percent from the fourth quarter of 2005, the smallest gain since 1993.

The numbers came a day after former Fed Chairman Alan Greenspan was quoted by Associated Press as saying that he couldn't rule out a U.S. recession later this year.

``Greenspan didn't seem to think recession is likely, just that it's possible,'' said Chris Low, chief economist at FTN Financial in New York. ``But when corporate profits start to shrink, investment starts to shrink with it, and that may be what we're seeing in durables report.''

Stocks Decline

U.S. stocks dropped the most since March 2003 after a plunge in Chinese equities sparked a global selloff. The Standard & Poor's 500 index fell 50.33, or 3.5 percent, to 1399.04 in New York. The Dow Industrial average declined 416.02, or 3.3 percent, to 12,216.24 in New York.

The yield on the benchmark 10-year note fell more than 11 basis points, or 0.11 percentage point, to 4.51 percent at 5:28 p.m. in New York. It was the biggest drop since Dec. 2004.

Durable-goods orders excluding transportation equipment dropped 3.1 percent, the most since July 2005. Excluding military equipment, orders fell a record 7.8 percent last month, while inventories of all durables rose 0.3 percent.

Reluctance to Invest

The figures suggest reluctance among companies to invest carried into 2007 after spending on equipment such as computers, machines and communications gear fell by the most in four years in the fourth quarter. Bloated stockpiles at auto dealers and construction-equipment makers may restrain production early this year, Bernanke told Congress this month.

Durables orders rose 2.8 percent in December. Economists had forecast a 3 percent drop in January, according to the median estimate in a Bloomberg News survey, after a previously reported 2.9 percent gain for December. Estimates ranged from a decline of 8.3 percent to a 1 percent rise.

Orders for non-defense capital goods excluding aircraft, a proxy for future business investment, slumped 6 percent, the biggest decrease since January 2004. Unfilled orders for such goods rose 0.9 percent last month.

Shipments of those items, used in calculating gross domestic product, dropped 2.7 percent, the most since September 2001, after falling 0.8 percent.

``We are going to see weaker sales in comparison to a year ago in the United States, particularly in housing-related sectors,'' James Owens, chief executive officer of Peoria, Illinois-based Caterpillar Inc., said in an interview Feb. 15. ``There is a slowdown in U.S. GDP, definitely.'' Caterpillar shares were down 2.5 percent at 11:34 a.m. in New York.

Software Spending

Spending on equipment and software fell in the fourth quarter by the most since the final three months of 2002, according to the Commerce Department's Jan. 31 report on gross domestic product.

``We'll see a figure similar to the fourth quarter for business spending,'' Low said. The drop in January ``was an eye- opener.''

Aircraft orders slumped 60 percent in January after rising 31 percent a month earlier, today's report showed. Chicago-based Boeing Co. received 13 orders in January, down from 212 in December, according to information on the company's Web site.

The economy expanded at 3.5 percent annual pace last quarter, based on the government's initial estimate. That figure is forecast to be revised lower in a government report due tomorrow after data released Feb. 14 showed companies added less to inventories in December than many economists had estimated.

Greenspan Comments

``When you get this far away from a recession, invariably forces build up for the next recession, and indeed we are beginning to see that sign,'' Greenspan said via satellite link to a business conference in Hong Kong, according to Associated Press. ``While, yes, it is possible we can get a recession in the latter months of 2007, most forecasters are not making that judgment.''

Orders for machinery dropped 9.3 percent, the most since January 2004, after rising 7.8 percent, today's report said.

Orders for computers and related products declined 5 percent after falling 3.4 percent. Communications equipment orders dropped 19.1 percent last month, the most since October. Orders for primary metals and motor vehicles also declined in January.

To contact the report on this story: Joe Richter in Washington at Jrichter1@bloomberg.net; Bob Willis in Washington at bwillis@bloomberg.net

Last Updated: February 27, 2007 17:30 EST