(Bloomberg) — Manufacturing in the U.S. expanded at a faster pace than forecast in August, signaling the industry that led the recovery will keep it from faltering.

Caterpillar Inc. is among manufacturers benefiting as companies replace aging machines, helping to support the expansion. The gains may partially compensate for a slowdown in consumer spending and sluggish housing market that are causing the world’s largest economy to cool in the second half of the year.

“The manufacturing sector has maintained its momentum at least through August,” said Zach Pandl, an economist at Nomura Securities International Inc. in New York. The report “makes clear the economy is not slipping into recession any time but it’s still reasonable to be concerned about where we’re heading over the next three to six months.”

Construction spending in July fell twice as much as forecast, led by a slump in homebuilding that will depress economic growth, Commerce Department figures showed today. The 1 percent drop brought spending to $805.2 billion, the lowest level in a decade, after a revised 0.8 percent decrease in June that wiped out a previously estimated gain.

Stocks Advance

Stocks extended gains after the manufacturing figure, with the Standard & Poor’s 500 Index rising 2.5 percent to 1,076.02 at 10:33 a.m. in New York.

Companies in the U.S. unexpectedly cut employment in August, data from a private report based on payrolls showed. Employment fell by 10,000, according to figures today from ADP Employer Services.

Estimates in the Bloomberg survey of 78 economists before the manufacturing report ranged from 49.9 to 56.

Manufacturing in other parts of the world was mixed in August. China’s purchasing managers’ index rose to 51.7 last month from 51.2, a government-backed report showed. A separate measure released by HSBC Holdings Plc and Markit Economics also increased.

Growth at Europe’s factories cooled and export demand dropped to the lowest in seven months. A gauge of manufacturing in the 16-nation euro region declined to 55.1 from 56.7 the previous month, London-based Markit Economics said.

Orders, Production

The ISM’s U.S. new orders measure fell to 53.1 from 53.5, while the production index increased to 59.9 from 57.

The employment gauge rose to 60.4, the highest since December 1983, from 58.6 in July and the index of export orders fell to 55.5 from 56.5 the prior month.

The measure of orders waiting to be filled fell to 51.5 from 54.5, and the index of prices paid rose to 61.5 from 57.5.

The inventory index increased to 51.4 from 50.2 in July. A figure higher than 50 means manufacturers are increased stockpiles.

Manufacturing, which accounts for about 11 percent of the economy, spearheaded the recovery from the worst recession since the 1930s as rising export demand led companies to ramp up spending on equipment and to replenish stockpiles.

Regional Reports

Recent regional factory reports showed the manufacturing expansion weakening. The Federal Reserve Bank of Philadelphia’s general economic index contracted this month for the first time in a year, while the New York Fed’s gauge rose less than forecast.

The economy is a top issue for voters in the November congressional elections, and polls show the public is increasingly skeptical of President Barack Obama’s performance. Public approval for his handling of the economy was at 41 percent in an Aug. 11-16 Associated Press-GfK survey, an all- time low and down from 50 percent last July.

Fed Chairman Ben S. Bernanke last week said the central bank “will do all that it can” to ensure a continuation of the economic recovery, and outlined steps it might take if growth slows.

“Investment in equipment and software will almost certainly increase more slowly over the remainder of this year, though it should continue to advance at a solid pace,” Bernanke said.

Consumer Demand

Intel Corp. last week cut its third-quarter revenue projection to $11 billion from the previously forecast $11.2 billion to $12 billion. The world’s biggest chipmaker cited weaker-than-expected consumer demand for personal computers in mature markets as the reason for the adjustment.

Cisco Systems Inc., the world’s largest maker of networking equipment, in August forecast first-quarter sales that missed analysts’ estimates. Chief Executive Officer John Chambers said the San Jose, California-based company was seeing “unusual uncertainty” and getting “mixed signals” about the health of the economy.

Some U.S. manufacturers are benefiting from growth overseas. Caterpillar, the Peoria, Illinois-based maker of construction and mining equipment, may add as many as 9,000 workers worldwide this year, Chief Executive Officer Doug Oberhelman said at a meeting with analysts Aug. 19.

–Editors: Vince Golle, Brendan Murray

To contact the reporter on this story: Courtney Schlisserman at cschlisserma@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz cwellisz@bloomberg.net

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