Manufacturing grew more quickly in September as production and hiring increased, suggesting that factories would help keep the economy from slipping into a new recession.

Other data on Monday offered more good news for the struggling U.S. recovery, with strong demand for new motor vehicles putting sales on an upward track and construction spending unexpectedly rebounding in August.

That hardly sounds like an economy flat on its back. The economy is still moving forward. But no one should confuse direction with speed, said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.

The factory sector has shouldered the broader economic recovery, with September marking a 26th straight month of expansion, and the manufacturing report implied an outright contraction in output would probably be avoided.

The Institute for Supply Management said its index of national factory activity rose to 51.6 last month from 50.6 in August, boosted by a rebound in production and increased factory hiring. But new orders fell for a third straight month.

Economists had expected the index to edge down to 50.5. A reading above 50 indicates expansion in manufacturing.

The data was eclipsed in financial markets by Greece's admission that it would miss its deficit target this year. That weighed on stocks worldwide. U.S. Treasury debt prices rallied, while the dollar rose against a basket of currencies.

U.S. officials and economists are keeping a wary eye on Europe, worried that any shock could send the slow-growing U.S. economy back into recession. Last month, the Federal Reserve warned of significant economic risks.

The growth in U.S. manufacturing is bucking a weak global trend. Factory activity in Europe and Asia slumped in September to levels not seen since the depths of the financial crisis, pulling global factory activity lower for the first time in more than two years.

VEHICLE SALES, CONSTRUCTION SPENDING STRONG

The U.S. economy grew at only a 1.3 percent annual rate in the second quarter, after edging up just 0.4 percent in the first three months of the year.

Faced with a recovery too slow to lower the unemployment rate, the Fed last month announced a new measure designed to push long-term borrowing costs lower by shifting assets on its balance sheet.

Soft consumer spending has kept the economy vulnerable, but last month households stepped up their spending on autos.

Initial sales reports from General Motors, Chrysler, Volkswagen, Nissan Motor Co and Ford put industry wide sales on track to near 13 million vehicles on an annualized basis in September.

That would be the strongest pace since April and an increase of roughly 10 percent from a year ago.

A lot of people are anxious about the future and you see that in the consumer confidence surveys, but at the same time many people are recognizing that this is a good time to buy, said VW America Chief Executive Jonathan Browning.

A separate report from the Commerce Department showed construction spending rose 1.4 percent in August as outlays on state and local government building projects rose sharply.

Economists, who had expected a decline, said it implied a somewhat stronger pace of third-quarter growth than they had been anticipating.

In yet another positive sign for the economy, borrowing by small businesses in August rose to its highest level since April 2008.

FACTORY EMPLOYMENT RISES

While manufacturing accounts for roughly 12 percent of gross domestic product and about 11 percent of nonfarm employment, the sector's continued expansion and an appetite by cash-rich businesses to spend on machinery should help to steer the economy from recession.

September's manufacturing report showed a pick-up in factory jobs, which could be a good omen for the government's monthly jobs report for September on Friday. The economy failed to add jobs in August, leaving the unemployment rate at a lofty 9.1 percent.

The one dark spot in the report was the third straight decline in orders.

The main concern going forward would be if new orders didn't pick up, said Bradley Holcomb, chair of the ISM manufacturing business survey committee in Dallas, Texas.

But inventory growth has been slowing and manufacturers viewed customers' supplies as too low, which could lead to an increase in orders. In addition, orders for exports rose and suppliers are taking a little bit longer to make deliveries to manufacturers, which is also a good sign.

(Additional reporting by David Lawder in Washington, Ellen Freilich in New York and Bernie Woodall in Detroit)

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