Adding to the improving economic picture, home prices posted their biggest annual increase in more than seven years in May, other data showed on Tuesday.

The economy appears to be finding some momentum after slowing early in the second quarter as the effects of cooling global demand and tighter fiscal policy started to take hold.

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"We are in a transition stage of the economic recovery, moving away from exports and government to private domestic demand, which would make this recovery sustainable," said Brett Ryan, economist at Deutsche Bank in New York. "We have been surprised how well the American consumers have weathered the storm from the end of the payroll tax holiday."

General Motors Co. and Ford Motor Co. reported stronger-than-expected sales, and Chrysler Group's sales met analysts' expectations.

The sturdy sales gains are being driven by demand for pickups and are largely because of the strengthening housing recovery.

Overall U.S. auto industry sales in June are expected to show a rise of up to 8 percent compared with a year earlier and could reach their strongest monthly pace since the 2007-09 recession pushed Chrysler and GM to seek bankruptcy protection in 2009.

GM expects a rate of 15.8 million, which would be the highest rate since November 2007.

"The fundamentals for continued industry gains in new vehicle sales remain intact," said Chrysler U.S. sales chief, Reid Bigland.

Housing is regaining its dominance in the U.S. economy, helping, for now, to blunt the blow from belt-tightening in Washington, a downturn in Europe and slowing growth in China.

A report by data analysis firm CoreLogic showed house prices rose 2.6 percent in May from April and were up 12.2 percent compared to May last year, the biggest year-over-year increase since February 2006.

Excluding distressed sales, properties that have been seized by lenders and short sales, prices increased 11.6 percent on a yearly basis.

THE HOUSING EFFECT

In addition to boosting household net worth, which supports consumer spending, the housing recovery has spilled over to manufacturing by fueling demand for construction materials and consumer items like stoves and refrigerators.

In a separate report, the Commerce Department said new orders for manufactured goods increased 2.1 percent after advancing 1.3 percent in April. Factory orders rose in most categories in May.

Manufacturing slowed in recent months, weighed down by deep government spending cuts and slowing global demand, especially in China and recession-hit Europe. But signs are the loss of momentum has run its course or is at least starting to ebb.

Data on Monday showed a gauge of national factory activity bounced back into growth territory in June, with new orders pushing higher.

The Commerce Department also revised up the increase in new orders for durable goods — manufactured products expected to last three years or more — by a tenth of a percentage point to 3.7 percent.

Even more encouraging, orders for non-defense capital goods excluding aircraft — seen as a measure of business confidence and spending plans — increased 1.5 percent instead of the 1.1 percent rise the department had reported last week.

The increase in the shipments of these so-called core capital goods, which go into the calculation of equipment and software spending in the gross domestic product report, was revised up to 1.9 percent from 1.7 percent.

"We think second-quarter GDP growth is now tracking close to our forecast for 2.0 percent," said Daniel Silver, an economist at JPMorgan in New York.

The economy grew at a 1.8 percent annual rate in the first three months of 2013.

"Core capital goods orders and shipments have clearly lost some momentum recently relative to late-2012 and early-2013, but the recent uptick in orders, as well as some other separate manufacturing indicators, signals a potential for some lift in activity to come," said Silver.

Indeed — unfilled orders for factory goods — a good indicator of future manufacturing activity, rose 0.8 percent in May. Unfilled capital goods orders excluding defense and aircraft were up 1 percent.

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