NEW YORK (CNN/Money) - Demand for durable goods made in U.S. factories soared in July, the government said Tuesday, hinting that the manufacturing sector's recovery resumed with gusto after stalling in June.

The Commerce Department reported that orders for goods made to last three years or longer, such as cars and computers, rose 8.7 percent to $179.7 billion following a revised 4.5 percent drop in June. Economists expected durable goods orders to rise 1.4 percent, according to Briefing.com.

It was the biggest jump for durables since a 9.2 percent gain in October 2001, the month in which economic activity returned more or less to normal following the shock of the Sept. 11 terrorist attacks.

Excluding orders for defense goods, new orders jumped 7.3 percent in July, the biggest gain on record. Excluding volatile orders for transportation, new orders rose 3.9 percent.

"The huge rebound in orders shows that, not only did the economy not collapse in June, but it is actually moving ahead at a decent clip," said Joel Naroff, president and chief economist of Naroff Economic Advisors in Holland, Pa.

The data gave an early boost to U.S. stock prices, but those gains were erased after a surprisingly weak report on consumer confidence. Treasury bond prices also fell.

Economists hoped the strength of durable goods orders was a sign that factory activity would increase this year, leading to more jobs, which would certainly support consumer confidence and spending, which fuels two-thirds of all economic activity.

The durable goods report did seem to soothe fears that the economy was in danger of sinking back into a recession that began in March 2001, although economists were quick to point out that the report is notoriously volatile and has been especially so recently.

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"This shows the recovery's still on track, but the volatility in orders we've seen in the summer indicates the recovery is still uneven," said Gary Thayer, chief economist at A.G. Edwards.

Economists at Salomon Smith Barney had predicted a 7.5 percent gain in durable goods orders, saying automobile sales in July were unusually strong, thanks to aggressive dealer incentives. Sure enough, orders for autos and auto parts rose 7.5 percent in July after falling 3 percent in June.

Salomon economist Chris Wiegand also noted that June's weakness was probably the result of seasonal adjustments during that month, and that averaging the growth in June and July offered a clearer picture of real activity.

"When you look at the two numbers together, overall orders are up about 4.2 percent, or 2.1 percent per month," Wiegand said. "That's not a stellar performance, but [it's] also much better than the market thought."

Strength was evident throughout the report, indicating that businesses were spending money on capital improvements. Non-defense capital goods rose a record 13.5 percent, orders for machinery rose a record 11.8 percent, orders for computers rose 13.9 percent, and orders for communications equipment rose 10.4 percent.

"This says businesses are gradually, grudgingly putting money to work," Wiegand said. "They're still being cautious, but not as cautious as the data before this morning would have suggested."

Federal Reserve Chairman Alan Greenspan and other economists have called business spending the key to the economy's health. The Fed has left its target for short-term interest rates alone this year, waiting to see if a hesitant recovery takes hold or crumbles.

Several reports this week could help to clarify the picture of the economy's health. On Monday, the government and the nation's realtors said the housing market continued to be strong.

Later in the week, the University of Michigan releases its own measure of consumer confidence, and Chicago purchasing managers release their closely watched measure of manufacturing activity in the Chicago area.