U.S. manufacturing grew at its fastest pace in seven months in December, extending a recent run of encouraging economic data and suggesting that expansion of the world's biggest economy will accelerate in 2011.

The Institute for Supply Management's national factory activity index rose to 57 from 56.6 in November, marking the 17th consecutive month of growth in the manufacturing industry, with a rise in new orders providing momentum for further growth.

A separate report on Monday showed construction spending hit a five-month high in November, more evidence that the U.S. economy picked up steam in the final quarter of last year.

These good numbers continue the story of an economic recovery, said David Carter, chief investment officer at Lenox Advisors in New York. For the market in general, we're off to a new start and people are optimistic.

Monday's data dovetailed with strong readings on employment and consumer spending over the last few months of 2010, leading economists to bet a fragile U.S. recovery may this year finally turn into self-sustaining growth.

Congress' decision last year to extend U.S. tax cuts has also aided consumers and lifted U.S. stock indexes, and economists say that may convince the Federal Reserve to end a $600 billion stimulus program as planned in mid-2011.

We're (starting) off the new year on a strong foot, said Zach Pandl, U.S. economist at Nomura Securities, adding the manufacturing report suggests the economy is accelerating and growth should be 3 percent in the first quarter.

European factory output also accelerated in December while growth in China and India slowed but remained robust. A healthy global economy is good news for U.S. exporters.

JOBLESS RATE STILL HIGH

Construction spending was lifted by investment in public projects, which rose 0.7 percent, while private investment rose to the highest level since June despite continued housing market weakness.

A caveat for the sunny outlook remains the unemployment rate, which stood at 9.8 percent in November and is expected to remain high for much of the year. The government's closely watched employment report due Friday is expected to show employers added 140,000 jobs last month, not enough to make much of a dent in the jobless rate.

Even the otherwise promising ISM report showed factory sector employment slipped to a nine-month low.

Ian Shepherdson, chief U.S. economist at High Frequency Economics, also said the ISM index provides little insight about smaller firms and has tended to overstate the pace of economic growth over the last three quarters.

But Paynet Inc said Monday that borrowing by small U.S. businesses jumped in November to he highest in more than two years, its fourth straight double-digit rise.

Economists at Goldman Sachs said last week they think signs of stronger U.S. growth will at least dissuade the Fed from adding to a $600 billion bond-buying program when it ends in mid-2011.

The bank's economics team had predicted the bond-buying scheme, aimed at boosting growth and holding down long-term interest rates, could swell to as much as $2 trillion, but have since beaten a hasty retreat.

If real GDP grows at a 3-1/2 percent to 4 percent pace in the first half of 2011, it is hard to see the Fed persist with additional bond purchases, they wrote in a note to clients.

Goldman still expects inflation to remain low and said the Fed is likely to hold short-term interest rates near zero all year and possibly through 2012.

So far, inflation has been modest. While the ISM report showed prices paid for materials hit a seven-month high last month, analysts say that has yet to be passed to consumers.

(Additional reporting by Lucia Mutikani in Washington, James Kelleher in Chicago and Ryan Vlastelica and Emily Flitter in New York; Editing by Andrea Ricci)

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