Nov. 24 (Bloomberg) -- U.S. orders for durable goods fell in October after surging the previous month, a sign businesses may have largely finished buying equipment to take advantage of an expiring tax break.

Initial jobless claims dropped to the lowest level since early September, and October new home sales rose to the third- highest ever, other reports showed today. Orders for durable goods, or items made to last at least three years, decreased 0.4 percent after a 0.9 percent gain in September that was four times more than first estimated, the Commerce Department said in Washington.

``The economy is in quite good shape,'' said Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut, in an interview. ``We are looking at good growth, not blowout numbers.''

Shipments increased in October, the durable goods report showed, suggesting that business spending on equipment and consumer purchases are driving the economy this quarter. Based on durables report, Morgan Stanley economists boosted their fourth- quarter GDP forecast to 4.3 percent from 4 percent. Income growth generated by the creation of more jobs may embolden consumers in coming months.

Initial jobless claims fell to 323,000 last week from 335,000, the Labor Department said. The four-week moving average declined to a four-year low of 332,000. A report next week may show the economy created 200,000 jobs this month after 337,000 in October, based on the median estimate in a Bloomberg News survey.

Sales of new homes increased 0.2 percent in October to a 1.226 million annual rate from 1.224 million a month earlier, the Commerce Department said. The median selling price rose to $221,800 and is up 14 percent from a year earlier.

The University of Michigan said its consumer sentiment index rose to 92.8 in November after 91.7 in October, likely reflecting job growth and higher stock prices.

Market Reaction

The benchmark two-year U.S. Treasury note's yield rose to 3 percent for the first time since June 2002. Signs of labor market strength may bolster speculation that the Federal Reserve will continue to raise the benchmark interest rate at what policy makers call a ``measured'' pace. The yield on the 2 7/8 percent note maturing in November 2006 was 3 percent at 10:44 a.m. in New York, according to bond broker Cantor Fitzgerald LP.

The Fed will raise its target rate for overnight bank lending to 2.25 next month to keep inflation from accelerating, said 20 of the 22 largest bond-trading firms. Policy makers have raised the federal funds rate a quarter point at each of their past four meetings from a four-decade low.

Investment this quarter will jump ``as a result of businesses front-loading spending'' before a provision in a tax law that President George W. Bush signed in May 2003 to encourage spending on capital equipment expires on Dec. 31, said Ted Wieseman, an economist at Morgan Stanley in New York. There may be a ``partial correction'' on first-quarter spending, he said.

Durable Goods

After the September durables revisions, the October dollar volume was close to estimates. Economists expected durable goods orders to rise 0.5 percent to $196.9 billion, based on the median of 70 forecasts in a Bloomberg News survey. Excluding transportation equipment, orders fell 0.7 percent, the first decline in four months, the Commerce Department said.

Orders for transportation equipment rose 0.3 percent after falling 4 in September. Bookings for motor vehicles dropped 2.8 percent and commercial aircraft orders fell 0.4 percent after a decline of 17.1 percent the previous month. A 35 percent surge in orders for defense aircraft accounted for the overall increase.

Machinery orders rose 3.7 percent last month after rising 3 percent in September. Orders for computers and electronic products fell 5.7 percent after rising 14 percent. Communications equipment orders rose 7.9 percent after jumping 35 percent.

``Companies are willing to spend money, if they see the benefit in productivity,'' Anne Mulcahy, chief executive at Xerox Corp. in an interview. Stamford, Connecticut-based Xerox, the largest seller of copiers in the U.S., said two days ago it expects sales next year to increase for the first time since 1999 amid growing demand for new products.

Tax Breaks

Businesses have been replacing outdated equipment to take advantage of the tax incentives set to expire at the end of the year. Large companies can write off 50 percent of qualified investments if the equipment is delivered by the end of the year.

Bookings for non-defense capital goods excluding aircraft, a proxy for future business investment, dropped 3.6 percent, the first decline in five months, after rising 5.2 percent in September. Shipments, which the government uses to calculate quarterly gross domestic product, rose 3.1 percent, the biggest increase since March, after falling 0.4 percent.

Orders for defense hardware rose 19 percent last month after a 28 percent increase in September.

With factory orders slowing, fewer shipments and less investment may follow next year. The economy is projected to grow 3.5 percent in 2005 compared with an expected 4.4 percent gain this year, according to economists surveyed this month by Blue Chip Economic Indicators. Business spending is likely to rise 8.5 percent after an expected 10 percent increase this year, the survey showed.

Home Sales

Home sales will reach a record this year before higher borrowing costs start to reduce demand in 2005, according to a forecast from the National Association of Realtors.

New home sales rose 12.7 percent in the West to a record 417,000 at an annual rate and 19.7 percent in the Northeast to an 85,000 rate. They fell 3.6 percent in the Midwest to a 216,000 rate and dropped 9.1 percent in the South to 508,000 at an annual rate.

The housing market is ``very strong,'' said Steven Rowley, chief executive of Eagle Materials Inc., a manufacturer of gypsum wallboard, cement and concrete. ``We still see a lot of need for construction materials'' in coming years. ``Long-term demand is a function of population growth in the U.S. We still see that will continue to be sustainable. The long-term trend still looks very good.''

To contact the report on this story: Carlos Torres in Washington ctorres2@bloomberg.net

Last Updated: November 24, 2004 11:01 EST