U.S. manufacturing mustered its highest level of activity in nearly a year in June but unexpected weakness in private sector employment signaled how slow an economic recovery might be, reports released on Wednesday showed.

While some parts of the economy are showing signs that the 18-month-old recession, the most protracted in decades, may soon end, job losses are seen accumulating long after the economy starts expanding again.

Even though the economy is starting to show signs of being about to turn, that's not the case for the labor market, said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts. The labor market is still getting worse, but it's getting worse more slowly, he added.

U.S. private employers slashed a bigger-than-expected 473,000 jobs in June, according to a report from ADP Employer Services released a day before the closely watched U.S. nonfarm payrolls report is due for release.

However, the ADP report showed the pace of private job losses slowed from the 485,000 lost in May. Since the labor market typically goes on deteriorating even after recessions end, the report left optimists' hopes intact that a feeble economic revival is around the corner.

Manufacturing and pending home sales reports on Wednesday show that the recovery is on its way, said John Forelli, portfolio manager at Independence Investments LLC in Boston.

These are steps in the right direction but investors must remain patient before receiving very positive news.

U.S. stocks gained following the data releases.

Investors' appetite for riskier assets such as stocks was also supported by a report from global outplacement consultancy Challenger, Gray & Christmas, Inc showing that planned layoffs at U.S. firms fell to a 15-month low in June, a fifth straight month of falls and the lowest since March 2008.

U.S. manufacturing shrank in June but at a slower pace than in May. The Institute for Supply Management said its index of national factory activity edged up to 44.8 from 42.8 in May and above economists' median forecast for 44.5. A reading below 50 indicates contraction.

Manufacturing is improving but it will probably take another three months to get it back into growth territory, said Norbert Ore, chairman of the Institute for Supply Management's manufacturing business survey committee.

Another report said pending U.S. sales of previously owned homes edged up 0.1 percent in May, for the fourth straight monthly gain.

U.S. construction spending fell 0.9 percent in May, however, to the lowest rate in more than five years, showing an economic stimulus plan passed in February had given little relief to public construction.

In further news from the battered U.S. housing market, creaking under the pressure of crimped consumers and the debilitated job market, mortgage applications fell to a 7-month low, a weekly report showed.

The Mortgage Bankers Association said its U.S. mortgage applications index fell 18.9 percent in the week to June 26 to its lowest since November, despite slightly lower borrowing costs.

Later in the session data are due on June sales of U.S. autos, an area hit especially hard by bankruptcies and layoffs as consumers retrenched in the credit crisis.

The United States may be in for up to one million more job losses this year and won't see a resumption of employment growth until 2010, said Joel Prakken, chairman of Macroeconomic Advisers, which jointly developed the ADP private jobs report.

Elsewhere, Japan's Tankan business confidence reading was worse than expected, while euro zone manufacturing contracted less than initially thought in June.

(Additional reporting by Herb Lash and Ryan Vlastelica in New York and Ros Krasny in San Francisco; Editing by James Dalgleish)

Manufacturing