The US manufacturing sector grew in August for the first time in over a year and a half, while pending home sales surged to a two-year high in July, adding to mounting evidence the longest economic slowdown since the Great Depression is ending.

The Institute for Supply Management said its index of national factory activity rose to 52.9 in August from 48.9 in July. The median forecast of 78 economists surveyed by Reuters was for a reading of 50.5.

A reading above 50 indicates expansion in the manufacturing sector. The last time the index showed growth in the sector was in January 2008 with a reading of 50.8. August was the highest since a reading of 52.9 in June 2007.

The manufacturing and housing data pushed US stocks higher and the Nasdaq rose more than 1.0 per cent while Treasury debt prices added to losses with the 30-year bond falling more than a full point. The US dollar fell against the euro and rose against the yen.

"Both reports are encouraging readings. I'm particularly encouraged by new orders and spread between new orders and shipments. The manufacturing recession is over. This is not necessarily a one-month event. This suggests manufacturing activity will be picking up," said Jonathan Basile, an economist with Credit Suisse in New York.

Regional US regional surveys have shown business picking up steam in August, though employment remained weak, consistent with fears the US could be in for a "jobless recovery."

Increased hiring is seen as critical to getting a consumer-led recovery under way. The US unemployment rate was 9.4 per cent in July. Economists expect a report on Friday to show it rose to 9.5 per cent in August.

However, the employment component of ISM showed some small sign of hope, rising to 46.4 in August to its highest since August 2008 from 45.6 in July.

Many analysts forecast the US economy will return to growth some time in the third quarter helped by the government's fiscal stimulus spending and the Federal Reserve's massive injections of liquidity into the banking system in the past year.

Also on Tuesday, the National Association of Realtors said its pending home sales index, based on contracts signed in July, rose 3.2 per cent to 97.6, the highest level since June 2007, from 94.6 in June. Pending home sales contracts have risen for a record six straight months.

Analysts had forecast pending home sales to rise by 2.0 per cent.

A nationwide slump in house prices for the first time since the Great Depression of the 1930s contributed to the credit crunch and contraction in economic activity in the past year, but recent housing data suggested home prices may have stopped falling.

Some stabilization in the three-year old housing downturn is seen as essential to any economic recovery.

Last week Standard & Poor's said prices of single-family homes rose for the second consecutive month in June, while the government said sales of newly-build single-family homes rose for a fourth straight month in July and the inventory of unsold new homes fell to the lowest in 16 years.

Earlier this month, the government said existing homes sales rose in July to mark the fastest pace in nearly two years.

Despite some optimism on manufacturing and the housing market on Tuesday, data also showed total US construction spending fell 0.2 per cent in July to the lowest rate since February 2004.

Analysts polled by Reuters had expected construction spending to remain unchanged from June. June's rise was revised down to 0.1 per cent from the originally reported 0.3 per cent. – Reuters