Retail sales nationwide rose at the fastest pace in three-and-half years in August and a gauge of New York State manufacturing activity hit a near two-year high, offering hope of a solid recovery from recession.

A separate report on prices received by producers nationwide rose faster than expected last month, a further sign that economic activity was firming.

The Commerce Department said retail sales climbed 2.7 percent after declining 0.2 percent in July. It was the biggest monthly advance since January 2006 and well above expectations on Wall Street for a 2 percent increase.

"Retail sales show the recovery is here. This wasn’t just autos, it wasn’t just gasoline. This was the U.S. consumer getting out of their foxhole," said T.J. Marta, market strategist at Marta on the Markets in Scotch Plains, N.J. "This is indisputably a good number."

The strong data pushed prices for U.S. government bonds lower, but stocks had trouble gaining traction and major indexes were down slightly.

Economists are generally in agreement that the U.S. economy is in the early phase of recovery from the worst recession in seven decades, but many remain worried about lackluster consumer demand with rising unemployment decimating incomes.

The Federal Reserve will consider the data at a meeting next week at which officials will debate when they should begin scaling back the extraordinary support they are providing the economy. One official has already questioned whether the central bank should move ahead with all its planned support.

Sales were bolstered by the government’s "cash for clunkers" program, which gave consumers cash to swap aging gas-guzzling cars for new, more fuel-efficient models.

Motor vehicle and parts sales surged 10.6 percent last month, their biggest rise since October 2001. Rising gasoline prices also added to the increase in overall retail sales.

The report, however, showed strength across most sectors, with the exception of furniture and building materials, evidence that the household spending that accounts for about 70 percent of U.S. economic activity was probably on the mend.

Excluding motor vehicles and parts, sales jumped 1.1 percent in August after falling 0.5 percent in July.

"The V-shaped recovery just got a badly needed shot in the arm today as the consumer is back in the game in a big way. The outlook for the economy just brightened considerably," said Chris Rupkey, chief financial economist at the Bank of Tokyo/Mitsubishi UFJ in New York.

A report from major credit card issuer Mastercard Inc. suggested consumers were using plastic less to make purchases. Mastercard’s finance chief said the volume of transactions processed nationwide fell 8 percent in July and August.

While questions still hang over the degree to which debt-laden consumers can help fuel an economic recovery, the manufacturing sector appears to be gaining strength.

The New York Federal Reserve Bank’s "Empire State" business conditions index, which gauges manufacturing activity in New York State, rose to 18.88 in September — the highest since November 2007 — from 12.08 in August. The survey is one of the earliest monthly guideposts to U.S. factory conditions.

A second Commerce Department report showed U.S. business inventories fell 1.0 percent in July to the lowest level since March 2006. Analysts expect a need for business to restock will help boost the economy over the second half of the year.

The drop in inventories and a slight rise in business sales pushed the inventory-to-sales-ratio, which measures how long it would take to clear shelves at the current sales pace, down to 1.36 months’ worth from 1.38 in June. It was the lowest ratio since October 2008.

Separately, the Labor Department said U.S. producer prices jumped 1.7 percent last month on the back of the biggest surge in gasoline prices in more than 10 years.

Over the past 12 months, prices received by U.S. farms, factories and refineries have fallen 4.3 percent, much less deeply than the record 6.8 percent drop registered in the period through July.

"The deflationary impulse from late last year is gone," Marta said.