A measure of factory activity in the U.S. Midwest rose to a 22-1/2 year high in January on strong orders and employment prospects, bolstering hopes the economy would stay on a solid growth path this year.

A second report on Monday showed consumer spending ended 2010 on a firmer footing, a trend that economists expected to continue as the labor market recovery gains traction.

The Institute for Supply Management-Chicago business barometer rose to 68.8 in January, the highest level since July 1988, from 66.8 in December. Economists had expected the index, which gives a first look at the manufacturing sector, to slip to 65.0.

A reading above 50 indicates expansion in the regional economy. The index was this month lifted by jump in measures for new orders and employment.

The factory sector news is an important positive omen for the broader economy, because increased production will yield significant income generation, which in turn will fuel stronger household consumption, said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities in New York.

In a separate report, the Commerce Department said spending increased 0.7 percent in December, advancing for a sixth straight month, after rising by 0.3 percent in November.

Economists had expected spending, which accounts for about 70 percent of U.S. economic activity, to increase 0.5 percent last month.

The spending figures were included in the government's fourth-quarter gross domestic product (GDP) report released on Friday, which showed the economy grew at a 3.2 percent pace on the back of robust consumer spending.

Spending in the fourth quarter grew at a brisk 4.4 percent pace, the fastest in more than four years. While economists see spending remaining strong this year, they expect the pace of growth to be less brisk than in the last three months of 2010.

While we doubt that the pace seen in the fourth quarter will persist in 2011, further labor market recovery and a gradual rebound in labor income should underpin solid and sustained consumption growth, said Peter Newland, an economist at Barclays Capital in New York.

Spending in December came as incomes increased 0.4 percent and savings dropped to their lowest level since March. Incomes grew 0.4 percent in November and the increase last month was in line with economists' expectations. Savings fell to $614.1 billion from $634.4 billion in November.

The report also showed the Federal Reserve's preferred measure of consumer inflation -- the personal consumption expenditures price index, excluding food and energy -- was unchanged in December after edging up 0.1 percent in November.

In the 12 months through December, the core PCE index rose 0.7 percent, the smallest increase since records began in 1959, after increasing 0.8 percent in November.

(Reporting by Lucia Mutikani and Ann Saphir in Chicago; Editing by Andrea Ricci)