Manufacturing grew for a 10th straight month in May and construction spending notched its fastest pace in nearly 10 years in April, suggesting the U.S. economy will add jobs and weather Europe's debt storm.

While the expansion in manufacturing was a touch slower than the prior month, the report on Tuesday showed underlying strength in the sector with the employment measure touching its highest in six years.

Thus far there is no evidence of a significant negative hit to export orders from the euro zone crisis or a prospective easing in the Chinese economy, said Brian Bethune, chief U.S. financial economist at IHS Global Insight in Lexington, Massachusetts.

There are fears spending cuts in Europe to address huge budget deficits could hurt demand and curb U.S. exports to the region, potentially slowing the recovery of the world's biggest economy that started in the second half of 2009.

The Institute for Supply Management's index of national factory activity slipped to 59.7 from 60.4 in April, but was above market expectations for 59.0.

A reading above 50 indicates expansion in the sector.

Export orders were the highest since December 1988.

Separately, construction spending in April rose 2.7 percent, the biggest advance since August 2000, from a gain of 0.4 percent in March, a Commerce Department report showed.

That was well above market expectations for a flat reading and gains were broad-based.

Stocks on Wall Street initially rose on the data, but major indices ended more than 1 percent down as energy shares tumbled in the wake of BP's failed attempt to contain an oil spill in the Gulf of Mexico rated the worst in U.S. history.

Prices for U.S. government debt rose and the dollar climbed to a fresh four-year high versus the euro.

EMPLOYMENT IMPROVING

Manufacturing has largely led the economy's recovery from the longest and deepest recession since the 1930s. Consumers are now stepping forward as the labor market improves.

A measure of manufacturing employment last month rose to its highest level in six years, boding well for May's closely watched employment report due on Friday.

A Reuters survey predicted nonfarm payrolls increased 513,000 -- the biggest single monthly gain since 1983 -- after a 290,000 rise in April although more than two-thirds of the gain was due to government jobs for the 2010 census.

The unemployment rate is expected to have edged down to 9.8 percent from 9.9 percent and remain a drag on President Barack Obama's popularity. High unemployment threatens to damage the Democrats at the midterm congressional elections in November.

Economists are upbeat on the labor market's prospects and noted the rise in manufacturing employment, a sector not usually associated with jobs growth, underscored the strength of the sector's recovery.

The supply chain pipeline is filling with orders and manufacturing firms are reluctantly, but out of necessity, adding staff, said Daniel Meckstroth, chief economist at Manufacturers Alliance/MAPI in Arlington, Virginia.

Factory activity in the euro zone expanded at a more sluggish pace in May from the prior month. In China, manufacturing grew for a 15th straight month, but the rate of expansion slowed from April.

New orders and production at U.S. manufacturers held steady last month and inventories fell. However, the backlog of orders increased, which should keep factories busy.

Adding to the positive economic note, construction spending increased across the board in April, with investment in private construction rising for the first time since October.

Analysts said the data was positive for overall economic growth in the second quarter.

Investment in private construction surged 2.9 percent, the largest increase since July 2004, after declining 0.5 percent in March, the Commerce Department report showed.

Spending was lifted by a 4.4 percent rise in private home building, the biggest gain in six months.

The pick-up in residential spending is consistent with robust gains in new home sales and very low inventories, said Julia Coronado, senior U.S. economist at BNP Paribas in New York. This should be a positive for second-quarter growth, although the strength is likely influenced by the home buyers tax credit and may fade in coming months.

Both new home and nonresidential construction were a drag on first-quarter growth.

Home construction activity picked up in recent months in response to a popular tax credit which required prospective home buyers to sign contracts by April 30 and close them by June 30. A lull is expected in the months ahead.

Private non-residential spending saw its largest increase since September 2008 and investment in public construction was the biggest in 14 months. Spending on state and local government construction projects was the fastest in just over a year. Federal spending on construction projects increased for a fourth month in April.

(Additional reporting by Alister Bell in Washington and Steven C. Johnson in New York)

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