U.S. factory growth best in 10 months; bolsters outlook

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U.S. manufacturing grew in April at the strongest rate in 10 months, easing concerns the economy had lost momentum at the start of the second quarter.

The Institute for Supply Management said on Tuesday its index of national factory activity rose to 54.8 from 53.4 in March.

The figure bested expectations for a decline to 53.0 and came in above the top end of forecasts in a Reuters poll.

A reading below 50 indicates contraction in the manufacturing sector, while a number above 50 indicates expansion.

"The view on the economy has swung from optimism to pessimism of late and this could bring us back to the middle," said Nick Bennenbroek, head of FX Strategy for North America at Wells Fargo.

"ISM suggests there's no real reason to get too concerned about the path of the U.S. economy at this point."

ISM's gauge of employment also rose to its highest level since last June, to a reading of 57.3 from 56.1. The forward-looking new orders component racked up its best reading in a year at 58.2, up from 54.5.

The strong labor figure comes ahead of the government's more comprehensive monthly jobs report due on Friday, which is forecast to show the economy added 170,000 jobs in April, including 22,000 manufacturing positions.

The national ISM report was in contrast to some regional manufacturing reports from the industry group, including Chicago on Monday, that had showed the rate of growth slowed last month.

It also bucked the trend of other recent data that suggested the economy lost some steam as the second quarter got under way, highlighting the bumpy nature of the recovery.

"We think the latest recovery is made of sterner stuff, although we doubt it will set the world alight," Paul Dales, senior U.S. economist at Capital Economics, wrote in a note.

Manufacturing accounts for about 12 per cent of U.S. economic activity and has been a cornerstone of the recovery from the 2007-2009 recession.

The economy grew at a 2.2 per cent rate in the first quarter, slower than the 3 per cent pace logged in the final months of 2011.

Tuesday's data sent Wall Street higher, with U.S. stocks .SPX up about 1 percent in late morning trading. It also helped the dollar rally from a one-month low against the euro, while Treasuries prices fell.

Markets have been speculating whether the Federal Reserve will embark on a third round of bond buying to drive down long-term interest rates and help bolster the economy.

Two top central bank officials on Monday said they saw no need for the Fed to ease monetary policy further.

The Fed has held interest rates at near-zero since late 2008 and has purchased more than $2 trillion in long-term securities as part of its efforts to bolster the fragile economic recovery.

The central bank has said it will likely keep rates at ultra-low levels at least through late 2014.

Separate data on Tuesday showed construction barely rose in March as investment in public projects dropped to a five-year low.

Construction spending edged up only 0.1 per cent to an annual rate of $808.07 billion, the Commerce Department said, after a revised 1.4 per cent drop in February. Economists polled by Reuters had expected construction spending to rise 0.5 per cent.

Also in March, lending to small businesses, a key driver of employment, fell for the third straight month, according to Thomson Reuters/PayNet Small Business Lending Index.

The ISM report on U.S. factory activity followed data out of China that showed manufacturing there rose to a 13-month high in April, though that reading was slightly below expectations.