The U.S. manufacturing sector contracted at a slower rate in May, while consumer spending fell modestly in April, according to reports on Monday that were further evidence the deep recession was easing.

The Institute for Supply Management said its index of national factory activity rose to 42.8 in May from 40.1 in April. This was the index's highest reading since September and was the fifth straight monthly rise.

Separately, the Commerce Department said consumer spending slipped 0.1 percent in April after a 0.3 percent fall in March and spending on construction projects rose 0.8 percent in April from March, the biggest increase since August.

Severe recessionary conditions appear to have subsided in the second quarter, said Michael Woolfolk, senior currency strategist at the Bank of New York-Mellon.

U.S. stock indexes extended gains after the economic data, while U.S. Treasury debt prices extended losses. The U.S. dollar extended losses versus the euro.

A reading below 50 in the manufacturing index indicates contraction. ISM said the index has been below this threshold for 16 straight months.

However, the fifth straight monthly rise in this measure of U.S. manufacturing followed encouraging signs from China and Europe that the world has moved past the worst the current downturn.

It was better than expected, and I would put particular emphasis on the new orders component, which broke above 50, said Michael Darda, chief economist at MKM Partners LLC, Greenwich, Connecticut. In my view, this is more evidence that we're getting closer to the end of the recession.

But this hopeful economic outlook was mitigated by the widely expected bankruptcy of General Motors , the biggest ever in U.S. manufacturing.

The Commerce Department report showed personal income rose 0.5 percent, the biggest increase since May last year, after falling by a revised 0.2 percent in March. Analysts polled by Reuters had forecast income to fall 0.2 percent in April.

Disposable income surged 1.1 percent in April, boosted by tax cuts and increased social benefit payments under the government's record $787 billion stimulus package, the Commerce Department said. Excluding the stimulus package, disposable income increased 0.7 percent in April.

Savings jumped to a record annual rate of $620.2 billion. The savings rate rose to 5.7 percent in April, the highest level since February 1995, from 4.5 percent the previous month.

Households, buffeted by job losses and falling asset values, are cutting spending on nonessential items, preferring to save any extra income.

In another report, the Commerce Department said private construction spending jumped 1.4 percent in April from March, the biggest advance since August. Private residential construction rose 0.7 percent, also the biggest increase since August, after declining 3.6 percent in March.

Spending on public construction fell 0.6 percent in April after increasing 1 percent in March. Federal spending on construction projects plummeted 6.5 percent in April, the biggest drop since January.

(Additional reporting by Richard Leong; Editing by Neil Stempleman)

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