A trio of reports Wednesday suggest that the economy may be headed for an acceleration in growth.

Most importantly, the Institute for Supply Management's nonmanufacturing index rose to 54.5 in May, its highest level in five months, from 50.7 in April. Economists had forecast a reading of 52. Any level above 50 is indicative of expansion in the sector. The nonmanufacturing index covers roughly 70% of the economy.

Separately, mortgage applications for purchases and refinancings hit a record high in the week ended May 30, according to the Mortgage Bankers Association. Its refinancing index also rose to a record high.

Homebuilder stocks, on a tear in recent weeks, rose following the report, with Hovnanian ( HOV) finishing up $2.14, or 3.7%, at $60.19. Hovnanian said orders for new homes were up 59% in May from the year-ago period.

Among other homebuilders, Toll Brothers ( TOL) closed higher 82 cents, or 2.8%, at $30.11, Pulte Homes ( PHM) advanced $1.83, or 2.8%, to $67.27, and D.R Horton ( DHI) ended ahead 90 cents, or 3.3%, at $28.58.

Finally, first-quarter productivity was revised to 1.9% from a prior estimate of 1.6%, with strength in nonfinancial corporate productivity. Unit labor costs rose 1.5%, compared with a previously reported 1.6%.

The reports come a day after comments from Federal Reserve chairman Alan Greenspan about weak economic data and the risk of deflation, leaving open the door for further interest rate cuts.

"On balance, today's reports on economic activity suggest the Fed ought to save the ammunition," said John Lonski, an economist at Moody's Investor Service, "though I don't think these reports, by themselves, are enough to suggest a quick return to trend economic growth looms."

Most economists are predicting stronger economic growth in the third quarter. "The data are getting better," said Christopher Low, an economist at First Tennessee Capital Markets. "Rate cuts are not necessary from a growth standpoint. But the Fed has to construct a firebreak against deflation."