U.S. manufacturing growth accelerated in January to its highest level in seven months, though a measure of employment faded and private-sector employers added fewer jobs than expected, data showed on Wednesday.
U.S. economic growth is widely expected to slow in early 2012 from the 2.8 percent pace in the final quarter of 2011.
We're not firing on all cylinders yet, but we are still moving down the road, said Scott Brown, chief economist at Raymond James in St. Petersburg, Florida.
The Institute for Supply Management (ISM) said its index of national factory activity rose to 54.1, from a revised 53.1 the month before, and was the highest level since June 2011. It fell just short of expectations for 54.5.
The private sector added 170,000 jobs last month, the ADP National Employment Report showed, shy of economists' expectations for a gain of 185,000 jobs.
It was the smallest gain in three months, though it was still in line with economists' forecasts for private job gains in the more comprehensive U.S. government labor market report on Friday.
Prospects for a third round of quantitative easing from the Federal Reserve remain good as long as unemployment stays above 8 percent, Michael Woolfolk, a senior currency strategist at BNY Mellon, wrote in a note.
The unemployment rate is expected to hold steady at 8.5 percent.
The Fed last week left the door open to additional economic stimulus, ramping up market expectations for another round of quantitative easing, known as QE3.
Uncertainty over the outlook for the U.S. economic recovery also prompted the central bank to signal it will keep interest rates at ultra-low levels for nearly three years.
But top central bank official Charles Plosser on Wednesday criticized the Fed for that move, saying it undermined confidence and caused confusion.
Such statements are, in my mind, particularly problematic from a communications perspective, Plosser, president of the Philadelphia Federal Reserve, said. Monetary policy should be contingent on the economic environment and not on the calendar.
The ISM new orders gauge for manufacturers gained to 57.6 from 54.8, while the employment index slipped to 54.3 from 54.8.
The manufacturing sector is doing OK, particularly given that the overall economy is growing at only 2 percent or so, said Cary Leahey, managing director at Decision Economics.
The overall economy lacks oomph and is having trouble creating jobs. Manufacturing is one of the few bright spots in an otherwise disappointing story.
An ISM reading above 50 indicates expansion in the sector.
Separate data from the Commerce Department showed construction spending jumped in December to its highest level in more than 1-1/2 years, breezing past expectations.
Economists said the construction activity likely added to fourth-quarter growth, and JP Morgan and Barclays lifted their estimate on gross domestic product for the quarter to 2.9 percent from 2.8 percent.
In the euro zone, factory activity continued to contract last month. China's manufacturers were more resilient, but new export orders fell sharply, showing the impact of distress in Europe.
Wall Street indexes rose more than 1 percent in afternoon trading, helped by the Chinese data and as Greece neared a long-delayed deal on a debt swap.
ADP also revised down December's private payrolls to an increase of 292,000 from the previously reported 325,000. The report is jointly developed with Macroeconomic Advisers LLC.
What we're seeing here is slow and steady gains. It's not disastrous, but it's not spectacular, said Joel Prakken, chairman of Macroeconomic Advisers.
Economists often refer to the ADP report to fine-tune their expectations for the payrolls numbers, though it is not always accurate in predicting the outcome.
The ADP figures have tended recently to overshoot the government report. The ADP report has come in stronger than the private payrolls component of the nonfarm jobs report for three straight months, averaging a 62,000 overshoot in the fourth quarter of last year, according to Jonathan Basile, director of U.S. economics at Credit Suisse.
Friday's report is expected to show the economy created 150,000 jobs, and a gain in private payrolls of 170,000, according to Reuters data.
Small and medium-sized companies added the most jobs in January, ADP said, with an increase of 95,000 and 72,000 jobs, respectively.
Separate data showed borrowing by small businesses rose in December to the highest level in more than four years, suggesting underlying strength for an important part of the economy.
In a positive sign for consumer demand, Chrysler Group's January auto sales surged, although sales at General Motors, the largest U.S. automaker, lost some ground.
(Reporting By Leah Schnurr; additional reporting by Richard Leong; Editing by Padraic Cassidy)