U.S. manufacturing contracted at a much slower pace in July, while construction spending rose unexpectedly in June, according to data released on Monday that bolstered the view the economy was pulling out of recession.

The Institute for Supply Management said its index of national factory activity rose to 48.9 in July from 44.8 in June, bringing the index much closer to the 50 reading that separates contraction from expansion.

The ISM index has not been above 50 since January 2008.

The July reading also was the highest since August 2008, and higher than the median forecast of 46.2 predicted by a Reuters survey of 72 economists.

U.S. construction spending rose 0.3 percent in June, with spending for public buildings reaching a record high, after dropping 0.8 percent in May, the Commerce Department said. Analysts polled by Reuters had forecast construction spending to fall 0.5 percent.

Analysts said the manufacturing and construction spending data was further evidence that the economic decline may be slowing, and stocks climbed more than 1 percent while prices of Treasuries slumped.

The dollar fell to a 10-month low against a basket of currencies as investors felt more comfortable turning to riskier, higher-yielding assets.

It's another data point showing that the economy is starting to bottom out here, and perhaps the worst is behind us, said David Dietze, chief investment strategist at Point View Financial Services in Summit, New Jersey.

Adding to the positive tone on Monday, Ford Motor Co said its U.S. auto sales rose 2.3 percent in July, marking the first year-over-year monthly sales increase since November 2007.

The news was not as good for Chrysler Group LLC, which reported July U.S. sales fell 9 percent from a year ago, or General Motors Co, which said U.S. sales last month fell by 19.4 percent from a year earlier.

EMPLOYMENT INDEX RISES

The ISM manufacturing prices paid index climbed to 55.0 in July, its highest since August 2008, from 50.0 in June, while the employment index rose to 45.6, also the highest since August, from 40.7 in June.

The U.S. manufacturing new orders index climbed to 55.3, the highest since July 2007, from 49.2 in June.

Within the construction spending data, public construction rose by 1.0 percent to $321.75 billion in June, which was the highest on record.

It was the fifth month in a row that public construction, which makes up a third of total U.S. construction spending, made gains.

And while private construction dropped for the second month in a row, by 0.1 percent, private residential building, which makes up a quarter of construction spending and has been clobbered in the recession, rose 0.5 percent to $246.07 billion in June.

For construction spending, all the signs are there that we've pulled back and that we are on the verge of growing again, said Jim Awad, managing director at Zephyr Management in New York.

Manufacturing New Jersey