The manufacturing sector grew faster than expected in August, chalking up a 13th straight month of expansion, helping to calm fears that economic growth was stagnating.

But other reports on Wednesday showing private employers unexpectedly cut jobs last month and construction spending tumbled to a 10-year low in July indicated the recovery from the worst recession since the 1930s faced major headwinds.

"We're in the middle of what is typically a growth scare, where the economic cycle slows down after an initial run up as stimulus fades and we transition from stimulus to having to the economy standing on its own," said Jason Pride, director of investment strategy at Glenmede Investment and Wealth Management in Philadelphia.

"Nevertheless, our expectation is that we don't have an economic double-dip, though we recognize that the risks of something like that are a lot higher now that we're closer to zero on the growth rate."

The Institute for Supply Management said its index of national factory activity rose to 56.3 from 55.5 in July. That was above financial market expectations for 53.0. A reading above 50 indicates expansion in the sector.

Separately, the private sector cut 10,000 jobs in August compared to a gain of 37,000 in July, ADP Employer Services said.

U.S. stock indexes rallied on the manufacturing report, while prices for safe-haven government debt fell. The U.S. dollar rose versus the yen.

The government is expected to report on Friday that nonfarm payrolls dropped 100,000 in August, the third straight month of job declines, with private sector employment increasing only 41,000, according to a Reuters survey.

Last month second quarter 2010 gross domestic product data showed the economic recovery slowing as the boost from an $814 billion government stimulus package and the rebuilding of inventories by businesses fade.

Manufacturing, which has been leading the recovery is still showing some strength and has expanded every month since August 2009.

Departing White House economist Christina Romer called on Wednesday for further steps to stimulate the U.S. economy, saying high budget deficits should not be an excuse for allowing the unemployed to suffer.

"We have tools that would bring unemployment down without worsening our long-run fiscal outlook, if we can only find the will and the wisdom to use them," Romer said in excerpts from a speech she will deliver later at the National Press Club.

A third report on Wednesday showed construction spending dropped 1.0 percent to an annual rate of $805.2 billion, the lowest since July 2000. June's construction outlays were revised down to show a 0.8 percent fall, instead of the previously reported 0.1 percent gain.

The ADP report on private payrolls followed the Challenger report, which showed the number of planned layoffs at U.S. firms fell 17 percent in August from the prior month.

Employers announced 34,768 planned job cuts last month, down from 41,676 in July, outplacement consultancy Challenger, Gray & Christmas, Inc. said.

It was the first month-on-month decline since April, when planned job losses had hit a seven-year low, and the lowest level since June 2000.

Though plans for layoffs are down, however, that still might not mean that hiring is at the top of companies' agenda.

"I think it's pretty clear what's happened is firing has stopped — we're not losing jobs at the disheartening pace we were a year-and-a-half ago — but widespread hiring has really not begun," said Joel Prakken, chairman of Macroeconomic Advisers LLC.

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.

In any case, the grim quality of the jobs data is likely to rekindle debate on how to get more people back to work, with the unemployment rate still high at 9.5 percent and expected to rise to 9.6 percent with Friday's report for August.

In other data on Wednesday, U.S. mortgage applications for home purchasing and refinancing increased last week as interest rates hit a new low, a glimmer of hope for a housing market that has failed to find footing in the absence of government support.

Demand for home loan refinancing rose for a fifth straight week, a development that may provide a much-needed jolt to a flailing economy as it could portend an increase in consumer spending.