New orders for costly and long-lasting U.S.-made goods rose a surprisingly strong 3.4 percent in March, according to a government report on Wednesday that showed businesses investing to expand operations.

The pickup in March durable goods orders followed a revised 2.4 percent February gain, the Commerce Department report showed, and handily surpassed Wall Street economists' expectations for a 2.5 percent increase.

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Even excluding transportation goods, which account for more than a quarter of overall business, March orders were up 1.5 percent after declining 0.4 percent in February.

A key component of the monthly report that serves as a proxy for business investment, non-defense capital goods excluding aircraft, posted a 4.7 percent increase in orders last month.

It was the biggest increase since September 2004 when orders rose 7.9 percent and followed declines of 2.3 percent in February and 6.2 percent in January.

"This is a helpful sign for the economy," said Kevin Flanagan, a fixed-income strategist for Morgan Stanley's global wealth management unit, based in Purchase, New York. "But it is too early to say whether or not capital expenditures are going to be back on the rebound just based on one month's data."

Bond prices weakened across the board on the sign of unexpected economic vigor as investors felt it reduced chances for cuts in official interest rates. Stock index futures gained on hopes it meant corporate profits will stay strong.

Economists and Federal Reserve policy-makers have been closely monitoring business investment behavior, concerned that if companies cut back spending it could deepen a slowdown in national economic activity that began late last year.

"Non-defense capital goods excluding aircraft was up strongly at 4.7 percent, and as the best leading indicator of business investment, is an optimistic positive signal for this key component of GDP," said Alan Ruskin, chief international strategist with RBS Greenwich Capital of Greenwich, Conn.

The government is scheduled to issue its initial estimate of first-quarter gross domestic product on Friday and analysts forecast it will show national economic growth slowed to a 1.8 percent rate from 2.5 percent in last year's fourth quarter.

New orders for transportation goods climbed 8.0 percent in March following a 10.2 percent rise in February. Orders for defense aircraft fell 48.8 percent last month after rising 24.5 percent in February.

Excluding defense items, March durables orders were up 4.5 percent following a 2.6 percent increase in February.

Separately, an industry trade group said on Wednesday that U.S. mortgage applications rose last week after five straight weekly declines, as lower loan rates fostered home purchases and refinancings.

The Mortgage Bankers Association said its mortgage applications index climbed by a seasonally adjusted 3.6 percent in the week ended April 20 to 653.3, its highest level since the week ended March 23 when it hit 671.0.

Thirty-year fixed-rate mortgages averaged 6.13 percent, excluding fees, down 0.09 percentage point from the prior week and 0.39 percentage point below the rate quoted in the same week a year ago.

Rising loan applications are a positive sign that a prices may have reached a level that will make it easier to work off some of the hefty inventory of unsold homes that is weighing on the housing industry.

A slowdown in homebuilding and sales is cited as the primary reason for the softer pace of economic growth, and economists are watching for any indication that weakness in the formerly booming housing sector may be coming to an end.

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