U.S. manufacturing mustered its highest level of activity in nearly a year in June but surprising weakness in private sector employment signaled how feeble an economic recovery might be, reports released on Wednesday showed.

Some parts of the economy are showing signs that the 18-month-old recession, the most protracted in decades, may soon end, but job losses are seen accumulating long after economic growth resumes.

Even though the economy is starting to show signs of being about to turn, that's not the case for the labor market, said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts. The labor market is still getting worse, but it's getting worse more slowly.

U.S. private employers slashed a bigger-than-expected 473,000 jobs in June, according to a report from ADP Employer Services, released a day before the closely watched U.S. government nonfarm payrolls report is due out.

However, the ADP report showed the pace of private job losses slowed from the 485,000 lost in May. Since the labor market typically continues to deteriorate even after recessions end, the report left optimists' hopes intact that a feeble economic revival is around the corner.

Both the manufacturing data and a report on pending home sales also released on Wednesday show that the recovery is on its way, said John Forelli, portfolio manager at Independence Investments LLC in Boston.

U.S. manufacturing shrank in June but at a slower pace than in May. The Institute for Supply Management said its index of national factory activity edged up to 44.8, the highest reading since last August and above economists' median forecast of 44.5. A reading below 50 indicates contraction.

It will probably take another three months for manufacturing to get back into growth territory, said Norbert Ore, chairman of the Institute for Supply Management's manufacturing business survey committee.

And an index of ending sales of previously owned U.S. homes, which measures homes which are under contract to be sold, edged up 0.1 percent in May, for the fourth straight monthly gain, a real estate trade group reported.

These are steps in the right direction but investors must remain patient before receiving very positive news, Forelli said.

U.S. stocks gained, as the U.S. data, as well as manufacturing data from China and Europe, reinforced hopes for recovery.

The Dow Jones industrial average closed up 0.68 percent at 8,504.06 points. The S&P 500 index closed up 0.44 percent at 923.33 points.

Investors' belief that an economic recovery was on the way was supported by a top Federal Reserve official and a report from global outplacement consultancy Challenger, Gray & Christmas, Inc showing that planned layoffs at U.S. firms fell to a 15-month low in June, a fifth straight month of declines and the lowest since March 2008.

Chicago Federal Reserve President Charles Evans said on Wednesday he expects the U.S. economy to grow in the second half of this year and was looking for growth of 2.5 to 3 percent in 2010.

U.S. construction spending fell 0.9 percent in May, however, to the lowest rate in more than five years, showing an economic stimulus plan passed in February has given little relief to public construction.

In further news from the battered U.S. housing market, mortgage applications fell to a seven-month low, a weekly report showed.

The Mortgage Bankers Association said its U.S. mortgage applications index fell 18.9 percent in the week to June 26 to its lowest reading since November, despite slightly lower borrowing costs.

Major U.S. automakers posted better sales for June than in recent months on Wednesday, led by Ford Motor Co. The results pointed to signs of some stabilization in the industry, which has been especially hard hit by bankruptcies and layoffs as consumers have retrenched.

Ford reported a 10.9 percent drop in U.S. sales in June, compared to its expectations for a decline of between 10 to 20 percent. GM's June vehicle sales fell by an adjusted 36.0 percent from the same month last year.

The United States may be in for up to 1 million more job losses this year and won't see a resumption of employment growth until 2010, said Joel Prakken, chairman of Macroeconomic Advisers, which jointly developed the ADP private jobs report.

Elsewhere, Japan's Tankan business confidence reading was worse than expected, while euro zone manufacturing contracted less than initially thought in June.

(Additional reporting by Herb Lash and Ryan Vlastelica in New York and Ros Krasny in San Francisco; Editing by Leslie Adler)