THE US manufacturing sector grew faster than expected in August, but private employers unexpectedly cut jobs, showing the economic recovery still faces headwinds.

The 13th straight month of manufacturing expansion calmed fears that the US economy may head back into recession, but the drop in employment and a slump in construction spending to a 10-year low in July kept concerns about slow economic growth alive.

“Our expectation is that we don’t have an economic double-dip, though we recognise that the risks of something like that are a lot higher now that we’re closer to zero on the growth rate,” said Jason Pride, director of investment strategy at Glenmede Investment and Wealth Management in Philadelphia. “We’re in the middle of what is typically a growth scare, where the economic cycle slows down after an initial run-up as stimulus fades and we transition from stimulus to having the economy standing on its own.”

The Institute for Supply Management said its index of national factory activity rose to 56.3 from 55.5 in July. Economists had forecast a fall in the index to 53.0. A reading above 50 indicates expansion in the sector.

In a separate report, the private sector unexpectedly cut 10,000 jobs in August compared to a gain of 37,000 in July, said ADP Employer Services.

US stock indices rallied on the manufacturing report, while prices for safe-haven government debt fell.

Last month second-quarter gross domestic product data showed the economic recovery slowing as the boost from an $814 billion government stimulus package and business inventories rebuilding faded. However, manufacturing, which has been leading the recovery, is still showing some strength and has expanded every month since August 2009.

“Over the first half of the year we saw much stronger growth on average; now we’re seeing things plateau, but certainly there’s no sign of a double dip in manufacturing,” said Norbert Ore, chairman of the ISM manufacturing business survey committee.

The manufacturing sector added jobs in August, according to ISM, though Ore said the pace of hiring remains fairly slow. “We lost a lot of jobs in the manufacturing sector and replacing them is very slow.”

The departing chairwoman of the White House’s Council of Economic Advisors, Christina Romer, yesterday called for further steps to stimulate the US economy, saying high budget deficits should not be an excuse for allowing the unemployed to suffer. – (Reuters)